Election Misconception
Markets Don’t Care About Your Election Worries
“The personal assaults, manipulation, backstabbing, and putting of party over principle or sound policy, constitutes the way the presidential game has always been played. There is nothing new under the sun. Politics hasn’t really changed and neither have the issues. National banks, federal powers, the size of the government, class warfare, religion, immigration, and, of course, taxes have stood as the hottest of hot button issues. They have divided the country since George Washington’s inauguration in April 1789.” – Kenneth C. Davis (2012)
As we inch closer to another presidential election, I would like to take a minute to remind you that the market doesn’t care about who is elected as president. Speculation, euphoria, doom-and-gloom – whatever emotion a popular headline can evoke to grab your attention and collect your clicks, will be used. As Sir John Templeton coined, "The four most dangerous words in investing are: 'this time it's different.'" And while it is not easy to remind ourselves that the people before us have been through something similar to what we are currently experiencing, especially from an emotional standpoint, a quick walk down memory lane helps to remind us of another famous, often used Mark Twain quote – “History doesn't repeat itself, but it often rhymes.”
As a financial planner, I am constantly meeting with clients and prospects about what is important to them, and our team focuses our attention on keeping them on the right track when it comes to meeting their financial goals. There are several topics that arise in most meetings that invoke an emotional response – family, taxes, and, of course, politics. Mixing emotion with anything can make a dangerous cocktail, but applying these hot-button items to how it affects someone’s money has led to me writing this piece. “What should we do considering the upcoming election?”
My answer is simple, although not easy to stomach. The market doesn’t care about who is elected. Stay the course.
If that answer leaves you feeling a bit “glass half empty,” you are no different from anyone else because you are human. Perhaps you are thinking:
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These are all valid questions and points and are worth considering with an eye on the future. They also can have an impact on markets in the short-term, but I argue that they will not stop people from waking up every day, putting their pants on (no offense intended to the work-from-home crowd), and going to work to try to make their company successful and profitable. In looking back at historical data, it is this profitability that has led companies, and the indices that track them, to support the claim that in the mid- to long-term (which is the timeframe for the families we serve), markets don’t care about the president.
This graph illustrates that party affiliation appears to have no direct effect on the performance of stocks, and we tend, often incorrectly, to give too much credit or too much blame to those in positions of power during good and bad market runs. I can think of no better example than when people mix up what capital markets are doing with how the economy is doing.
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James Carville, while serving as President Clinton’s campaign manager, famously used the line “It’s the economy, stupid” when talking about voters’ concerns. He was engaging in short-term thinking by identifying a hot button talking point to drive up support for Clinton. A glaring issue with this is something you will hear economists and financial advisors both stress to whomever will listen – THE ECONOMY IS NOT THE MARKET. ?Add in the fact that many voting Americans get their perceptions about the state of the current economy from their favorite politicians, news agencies, or political pundits who are all biased, unconsciously and/or consciously. While biases are becoming more identified and understood, rarely do I see or hear a talking point about leading and lagging indicators. That is most likely because economics are complex. In the case of the economy and its relationship with market performance, failing to understand or remember what was taught about lagging indicators in economics class is replaced by emotion and the biases mentioned earlier, which is shown nicely in the chart below:
While I attempt to be more tactful than Mr. Carville in my discussions, understanding that most of the clickbait and talking points spewed out in an election season is just noise when it comes to investing for your future. Pundits and authors do not consider your individual circumstances, needs, and wants when they are making their points. And no one has shown an ability to correctly predict the stock markets’ ups-and-downs, including those who speculate about who will win an upcoming election. An implication that a certain party’s victory will cause markets to rise or fall implies that markets can be predicted, and, therefore, money can be made in the short-term from market timing strategies. We have yet to meet anyone who can prove they are successful at these said predictions. These may be good for entertainment and politics but are unreliable for creating long-term investment strategies.
Part of any financial professionals’ regular jargon is that “past performance is no indication of future performance,” and the same applies here. But if we look at the data over a significant time period as shown in the first graph, investing for the long-term is a recipe that helps create wealth.
So, I encourage you to vote in this upcoming election for anyone who gets you excited about the future. I also challenge you to avoid the emotional trap that many media outlets set in their attempt to create a buzz around the election by talking about how this will impact your family financially. Tell yourself that there have been generations of people before you that have been through similar versions of this before, and yet here we are still chugging along at near all-time market highs in the public sector. And if that inner dialogue isn’t working or the idea of a long-term plan sounds appealing, please feel free to reach out to me and we can discuss what is truly important to you. Because unlike what the market thinks about you and your financial goals, I do, in fact, care.
“Markets aren’t red or blue, they are green.” - unknown
?Thank you for reading,
?Bobby Boswell, CFP?
Wealth Advisor | [email protected] | P 281-822-8825