The December 14 electoral college vote confirmed Democratic presidential nominee Joe Biden will become the 46th President of the United States. Even before the vote, speculation about Biden’s potential policies, cabinet nominees and their potential implications for the economy and stocks had already reached fever pitch.
In every US Presidential election cycle, investors on both sides of the aisle tend to scrutinize these decisions and campaign promises. Unsurprisingly, many Democrats see a Republican president as bad for the country and economy, while many Republicans see a Democratic president similarly. But making investment decisions based on your party preferences can be dangerous.
We believe politics are an important driver of markets and the economy, but too often, investors let their political biases influence their economic and investment analyses, which can lead to behavioral investment errors. For that reason, our political commentary is intentionally non-partisan. We favor no politician nor any political party and assess developments solely for their potential market impact (or lack thereof).
Many investors believe “market friendly” candidates and economic policies are needed for stocks to rise. But markets don’t have a preferred party, and stocks have risen on average regardless of which party is in the White House. Don’t believe it? History shows stocks have averaged 9.5% annual returns during Republican presidential terms and 14.8% annually during Democratic presidential terms.[i] Stocks just don’t play partisan politics.
Stocks don’t love or despise a political party or candidate—what stocks really despise is uncertainty. Political and economic uncertainty comes in large part from new legislation, which changes the rules for institutions and creates economic winners and losers. If a company fears government regulations may change in a year or two, it may not pursue new projects it deems unprofitable after legislative changes.
We believe an underappreciated bullish factor for markets is the potential for political gridlock. Though gridlock can be frustrating from a social standpoint, it can mitigate potentially sweeping legislative changes and provide more clarity for executives and investors to plan. This is why our US political and economic analyses focus not just on the US presidential election, but on congressional races that help determine the level of political gridlock.
As widely expected, election uncertainty persisted beyond Election Day. However, Joe Biden will be inaugurated on January 20 and the Democratic Party will control Congress, albeit with very narrow majorities in both chambers.
While Democrats now control the White House and Congress, we believe their razor thin Senate majority (a 50-50 deadlock with VP-elect Kamala Harris casting the tie-breaking vote) raises the odds for intraparty gridlock. With that slim edge, any one or two Democratic dissenters can prevent a bill’s passage, likely killing or watering down potential legislation. We believe narrow Democratic majorities in both chambers likely prevent broad, sweeping legislation—a bullish feature for stocks.
We believe long-term investors are best-served refraining from altering their investment strategies based on the election alone. One of the worst things you can do is allow your emotions to derail your long-term plan based on the election outcome. Remember to study what politicians do, not what they say and try to keep your own political beliefs out of your investment decision making. If you have trouble doing so, a trusted investment adviser may be able to help.
Come back to this page regularly to stay up to date on how Fisher Investments views on new political developments’ potential impact on investments and economics. Or call us at (800) 568-5082 to speak with a qualified representative who can provide further guidance on your personal situation.
[i] Source: Global Financial Data, Inc., as of 7/16/2020. S&P 500 average annual total return in years Democratic and Republican presidents are in office, 1926 – 2019.
Are you prepared to steer your portfolio through the uncertainty of this election year? We can help. Our Stock Market Outlook includes in-depth commentary on the 2020 elections with exclusive research you can use for your investment strategy.Download the guide