Debunking Popular Myths About Post-Election Market Direction

Debunking Popular Myths About Post-Election Market Direction

Debunking Popular Myths About Post-Election Market Direction

Politics has become such a hot-potato topic that most financial advisers trying to avoid it when talking with clients, Jeff Benjamin observes wryly in Investment News. Whether Democrat or Republican, educating clients and debunking myths that keep clients from making reasoned investment decisions is nevertheless part of an advisor’s job. “People are polarized, but it’s the adviser’s job to focus on what the potential political impact would be on the investment portfolio.”

“I’m often asked by advisors and their clients,” wrote Matt Potter in Financial Planning towards the end of last year, “how the economy will be affected if this side or that side wins. Normally, I try to answer such questions in a very measured and objective way, because political discussions in a polarized climate don’t always bring out the best in people.”

Let the facts tell the story, advises Innovative Portfolios CIO Dave Gilreath. It might seem the stuff of a Ripley’s Believe It or Not episode, but, over the past more than 70 years, both the stock market and the economy performed better under Democratic presidents than under Republican leadership. The score for the S&P 500? As Markets Insider chronicles, 10.8% to 5.6% in favor of Democrats.

Oh, well, your best-educated and most opinionated client might counter. The Great Recession and COVID-19, both of which occurred under Republican presidents, skewed the average downward for the Red team. Sorry, advisors can reply, but even excluding the results from both those disastrous periods of time, the data still favor the Democratic side. In any event, you can tell clients to stop stressing, because the data doesn’t matter much anyway, Mackenzie Sigalos chuckles in a pre-election piece for CNBC: “Elections have seldom had a lasting impact on equity prices.”

What has had some impact on stocks is the combination of party control in the House and Senate, data compiled by LPL Financial shows. Stocks appear to perform best when a Democrat is in the White House and Congress is split in favor of Republicans.

 How the Economy and Stocks Perform under GOP and Dem Control

PresidentCongressAverage GDPAverage S&P 500 ReturnYears
Source: LPL Financial

What about those recessions? “Party control of the White house since 1950 has shown vastly more recessions for Republicans (10 versus one),” Larry Light of Chief Investment Officer reminds investors.  

Blue waves have not been bearish for stocks, LPL Financial Research shows. Far from it—the S&P 500 moved higher during 6 of the seven times Dems were in power since 1950.

It’s no myth that, historically, stocks do better if an incumbent president wins versus a new president in office, LPL Financial’s market strategist Ryan Detrick of LPL concedes. Still, in the nine times (since 1900) new Democratic presidents have brought with them both House and Senate, stocks were up an average of nearly 12%.

Remember, politics, the economy, and the stock market are cousins, not brothers, Gilreath says. Any data we have on the economy, by definition, refers to the past, while the stock market is a forward-looking mechanism. Meanwhile, the bulk of the government budget is already committed (think Social Security and Medicare), leaving no room for earthshaking, sudden changes. For all those reasons, Gilreath advises telling clients, “You can’t let politics influence investment decisions.”

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