The day after Barack Obama was reelected in 2012, the Dow Jones Industrial Average dropped 313 points to close just under 13,000. Some believed Obama would not be as good for the stock market as the “business-friendly” candidate, Mitt Romney, would have been. Four years later, on Election Day 2016, the market had exceeded 18,000.
Upon Trump’s election, the stock market tanked nearly 1,000 points in overnight trading – some believed it was his chaotic style of governing that would cause the markets to implode.
And yet, two years since the election, the market has continued its nine-year historic ascent to above 24,000.
Right-wing pundits feared Obama’s presidency would cause the market to implode too. Left-wing pundits stoked fears of Trump destroying the economy, sending it into a death spiral.
With the partisan politics poisoning our family dinners and newscasts, it’s easy to let our emotions and political leanings impact how we trade. Biases cause investors to choose one path or buy/sell based on beliefs and not looking at the picture objectively. This means folks are missing out on opportunities to increase their wealth.
According to “Political Climate, Optimism, and Investment Decisions,” a study conducted from 1991 to 2002, if someone’s preferred political party is in power, they are more likely to see the investing environment more conducive to risk. A New York Times article from January 30, 2010, also cited evidence that investors opted for domestic stocks over foreign stocks when they were comfortable with the political party in power. Overall, investors shun a buy-and-hold approach and tend to trade more actively when their preferred party is out of power. This leads to inferior portfolio performance due to frequent trading expenses.
At Telemus, we encourage everyone to vote for the candidate they believe is the best one, however, when it comes to your portfolio, we insist leaving the political views on the sidelines and look at the investment strategy objectively.
Short-Term vs. Long-Term
Different policies and the direction of election polling definitely can have short-term implications on the direction of stocks and the stock market. It was in mid-April 2016, that the stock market had a major bump upwards – the analysis: Clinton all but secured the nomination for her party and was positioned to beat Trump (then the likely Republican nominee) in November.
That’s just people buying and selling based on the news of the day and their gut feelings. Uncertainty and subjectivity causes fluctuations but, regardless of the political party in power, recessions will come and go, bulls and bears arrive in cycles and, for the history of the stock market so far, the number always rises over the long-term.
Tariffs, for example, may not impact the market for two or three years depending on its industry, however, short term investors are spooked and that uncertainty pushes the market down. Sanctions and heightened tensions like the current situation in Iran and Saudi Arabia may increase the price of oil commodities and have short-term effects. This isn’t bi-partisan, it’s reality.
Investors should avoid looking through a Republican or Democrat lens, instead look more for opportunities. Simply, where are the opportunities to make money?
Focus on Your Portfolio
This is not to say that politics doesn’t play a part in the reality of the stock market, it’s just an investor shouldn’t rely on their biases to make decisions about the future of their portfolio. Regularly assess your current situation and define, or redefine, what your goals are. Once you determine that, set up a strategy to accomplish those goals.
Part of the planning involves maintaining a diversified portfolio to protect against risk as well as having pieces of the portfolio that is allocated in a way to take advantage of opportunities that may come with the equity market.
An example, if someone would have moved all their assets from equities into bonds because they feared the incoming Trump administration’s policies, they would have missed 35-40% of appreciation. If their goals were to retire in 5 years, they may not be able to get to the dollar figure they want to reach.
Bottom line: have a strategy and stay disciplined regardless of politics.
Confirmation biases tend to creep in to make us seek the information that verifies we’re right – it’s human nature. Everybody has these inherited biases, including financial advisors, but a fiduciary’s responsibility is to invest based on the client’s best interest – sometimes it’s trying to talk people off the ledge and keeping them on track. Recognize political biases exists so you can focus objectively on investments and help keep your financial goals on track.