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Your Investments are Non-Partisan

With the election year fury reaching its apex, it is easy to believe that political outcomes in November will have a significant impact on your investments. The table below looks at how markets have fared depending on who controls the White House, Senate and House of Representatives. Interestingly the markets have done best when Republicans control Congress and Democrats control the White House.

POLITICAL CONTROL AND THE USE STOCK MARKET (AVERAGE ANNUAL RETURNS 1950-2019*)

Political202008*NOTE: Average annual S&P 500 Total Return Index. Source: AthenaInvest, Inc. and S&P Dow Jones Indices LLC 

The chart shows various combinations of White House and Congressional control since 1950. Returns range from 8.6% to 18.5%, with an average of 12.7%. The worst periods have been when Democrats control Congress and Republicans control the White House. The best periods have been when Republicans control Congress and Democrats control the White House.

Most of the time the political environment is mixed with policy and other significant changes getting bogged down by the legislative process and the subsequent effects of policy felt over time with both intended and unintended consequences. While interesting, there is little conclusive research directly linking election results to market returns or consistent effective ways to invest upon them.

Politics generate strong emotions that translate into deeply rooted biases and opinions along with powerful urges to act upon them, often by staying on the sidelines or jumping into the market, before or after the election, depending on your point of view. However, for the typical investor trying to navigate political events is unlikely to outperform the long-term average of 12.7%. While politics are an important part of our civic lives, don’t let them derail your investments. Stick to your long-term investment process.

From the Behavioral Viewpoint

What is going on?

  1. The emotional response to elections is a classic availability cascade where a topic so dominates our daily lives that it spills into all our decision making.  

  2. Overconfidence bias comes into play with investors thinking they can predict election outcomes along with the economic and market implications of a given party winning.

  3. We are subject to confirmation bias and believe things that confirm our existing beliefs.  

  4. Markets and investors don't like uncertainty and elections create a systematic uncertainty for everyone, increasing volatility and fear in the markets. 

What can we do?

  1. It is good for investors to focus on elections as citizens, as policy direction can be influenced by their votes. But don’t let the associated strong emotions drive long-term investment decisions.

  2. Understand the real impact that parties and administrations have on markets is unpredictable and limited. In the end, the US economy and markets are resilient and have performed in a variety of conditions, regardless of who is in control!

  3. Have a financial plan and make investment decisions based on a disciplined process.

  4. Work with a trusted advisor who can help to temper strong emotions and avoid costly mistakes.

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Behavioral Viewpoints features new topics each month which are intended to help advisors and investors gain a deeper understanding of how behavior shapes the investing landscape. 

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IMPORTANT INFORMATION AND DISCLOSURES

The information provided here is for general informational purposes only and should not be considered an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.  It should not be assumed that recommendations of AthenaInvest made herein or in the future will be profitable or will equal the past performance records of any AthenaInvest investment strategy or product.  There can be no assurance that future recommendations will achieve comparable results.  The author’s opinions may change, without notice, in reaction to shifting economic, market, business, and other conditions.  AthenaInvest disclaims any responsibility to update such views.  These views may not be relied upon as investment advice or as an indication of trading intent on behalf of any AthenaInvest.

You are solely responsible for determining whether any investment, investment strategy, security or related transaction is appropriate for you based on your personal investment objectives and financial circumstances.  You should consult with a qualified financial adviser, legal or tax professional regarding your specific situation.  Investments involve risk and unless otherwise stated, are not guaranteed. Past performance is not indicative of future performance.

ABA-2020-08

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