Amid Election Uncertainty, Remember to Focus on the Long Term

The contentious U.S. presidential election is over. Given the roughly even split among voters, it’s understandable that a great deal of readers are disappointed—and others elated—at the results. When it comes to investing, however, these emotions must be set aside. History makes it clear that the stock market has no political preference.

My message to investors this week, and in future weeks/months as the transition of power takes place, is clear: stay focused on your objectives and remember what it takes to achieve them. And that is, an asset allocation that’s aligned with your long-term goals, income needs, risk tolerance, and one that’s driven by economic fundamentals and corporate earnings. Short-term political outcomes should be walled off from these considerations.

This is not to say that the election result does not matter. It does, as the president influences and sometimes establishes economic policies. But these changes do not take place immediately—there is plenty of time to assess how campaign proposals take shape as actual policy, and/or whether many of the ideas floated on the campaign trail get watered down substantially or scrapped altogether. Remember, too, that economic cycles do not fit neatly into four-year boxes depending on what party is in power.

History reminds us to keep our cool. Since the inception of a version of the S&P 500 in the 1920’s[1], there have been 24 U.S. presidential elections. In 20 of them, the S&P 500 Index registered positive total returns. In the four instances when the stock market fell, the U.S. economy was in the Great Depression, the early days of World War II, the 2000 tech bubble, and the 2008 Global Financial Crisis.?Today, we have 4% unemployment, roughly 2.5% inflation, 2+% GDP growth, and solid corporate earnings growth (see below). This is the data that matters.(1)

Nevertheless, in the 30+ years I’ve been an investment manager, there has always been investor sentiment that if candidate ____ wins the election, it will be terrible for the stock market. But a look at past election year returns—as well as longer-term returns for U.S. stocks—demonstrates that such an outcome has never materialized. In the cases where we have seen post-election downturns, it has been tied to broader economic factors—not the election or re-election of a president.

The chart below drives this point home. If a person invested money in the stock market only when their preferred political party was in the White House, it would have meant severely reducing total return over time. This is true of both Democrats and Republicans. Investing for the long-term—regardless of who was president—clearly delivered the best result. ?

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If investors are looking for somewhere to divert their attention in a noisy political climate, look no further than U.S. corporate earnings. The news cycle has essentially buried any mention of the stock market’s most critical driver, in my view. There are plenty of reasons to be optimistic.

Through November 1, we have seen Q3 results from 350 S&P 500 index members, or 70% of the index’s total membership.?Total earnings for these 350 companies are +8.8% higher than the same period last year on +5.7% higher revenues. 74.9% of these reporting companies beat their earnings per share (EPS) estimates and 60.6% beat revenue estimates. These are solid results.

If we look at earnings and revenue growth rates for these 350 companies compared to previous periods, we find that both are solidly above average.

In terms of ‘beats percentages,’ we also see earnings and revenue well within historical averages.?

Finally, if we combined current results with Zack’s estimates for the 150 companies yet to report, we find that total earnings growth for the S&P 500 index could be +6.8% year-over-year on +5.4% higher revenues. Again, these are nicely positive results, and ones that investors should focus on more than the election.

Bottom Line for Investors

Over time, the stock market responds more to long-term earnings and economic growth trends, not to changes in political leadership. The emotional gravity of an election—and this election in particular—may make it appear as though the outcome will make or break the nation. But I believe this mindset puts far too much emphasis on political figures and policies, and far too little emphasis on the real engines of the U.S. economy – corporate earnings, small business growth, investment, the consumer, and innovation. Politicians come and go, but the desire to grow, innovate, and pursue profit remains a constant.?

1 The S&P 500 Index in its current form was created in 1957. However, as early as 1923, the Standard Statistics Company, which later became Standard & Poor's in 1941, created its first stock market index, which tracked the stocks of 233 US companies on a weekly basis.?Three years later, the company developed a 90-stock index that was calculated daily.

2 Charles Schwab. 2023.

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