On January 20, 2021, Joe Biden was inaugurated as the 46th President of the United States. Even before the November 2020 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—which often fail to become reality. 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 is the President of the United States and his Democratic Party also controls Congress, albeit with very narrow majorities in both chambers.
We believe Democrats’ razor thin Senate control (a 50-50 deadlock with Vice President 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. In the House of Representatives, Democrats hold a similarly slim edge—the smallest since 1900—and redistricting looms, which likely influences some swing-district Democratic representatives to moderate. 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 politics alone. One of the worst things you can do is allow your emotions or biases lead you to stray from your long-term investment plan. If you have trouble staying disciplined or if you think you could benefit from professional experience, 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