As you will know if you read yesterday’s Market Musings, I am using my last week of regular contributions to Nasdaq.com to reemphasize some of the things that I regard as the most important concepts and ideas for retail investors to understand. Even if this wasn’t my final week, I would almost certainly have written something on the subject of politics and investing given that we are already in the seemingly interminable run up to a Presidential election later this year.
It is often said that the first casualty of war is truth, but that noble concept gets pretty dinged up in an election, too. Politicians are always somewhat selective with their facts, but that tendency is exaggerated in a high-stakes election, and both sides believe that this year’s contest is indeed high-stakes. They will each tell you that they represent the “real” America, something the other side is set on destroying, and that electing their opponent will result in economic collapse among other disasters.
Fortunately, if not surprisingly, neither is telling the truth.
One of the greatest traits of the US economy is its resilience. The history of America, indeed of most developed Western countries, is one of economic growth and success despite, not because of, politicians. Crises come and go, some maybe prompted by political decisions, and some maybe helped to recover by them, but the overall wealth of the country has marched inexorably upwards for centuries. Nor is that something exclusive to America. The free market-leaning US model has been enormously successful, but then so have the more regulated, welfare-focused economies in Western Europe and Scandinavia.
As long as people are free to pursue profit in what they regard as the best way, and as long as capital is mostly allocated correctly, there will be economic growth that benefits the whole of society. There can be questions about how evenly those benefits are distributed and even exactly what constitutes an equitable distribution, but ultimately, we all benefit from economic growth to some extent. That fact is recognized in America by both sides of the political divide. Even though it may not seem that way right now, there is a lot more that unites Americans than divides them, at least when it comes to basic economic beliefs.
Maybe that is why the actual data show that many of the preconceptions around the impact of who is in the White House on the economy are completely wrong. We start from the incorrect assumption that the two party’s attitudes to the economy are very different. Republicans are generally seen as being more pro-business and therefore better for the economy than Democrats, but the facts tell a different story, with GDP growth and job creation both better under Democrats in the post-WW2 period.
A strong argument can be made, however, that, given the usual time lag between policies being signed into law and their impacts being felt, those numbers are deceptive, or that the numbers here are a statistical anomaly caused by several economic disasters that have occurred during Republican presidencies that are not the fault of the White House. Covid during Trump’s Presidency, for example, or the credit crunch during George W. Bush’s. Then there is the fact that fiscal decisions, the most basic economic policy decisions, are made by Congress, not the President.
When those things are considered and simple logic is applied, it seems that which party controls the White House has basically no impact on the stock market.
And yet, many investors still allow their political biases to impact their investing decisions. When Barack Obama was elected in 2009, many diehard Republicans, convinced that he was a committed socialist who would destroy American business, sold out of their stock investments. Those who did missed out on one of the strongest eight year periods for the major market indices in history. Similarly, there were some who believed that Donald Trump, through inexperience, a chaotic management style, or just plain incompetence, would crash the economy. They too missed out on some spectacular market gains, even after the pandemic caused a major collapse.
The overall lesson for investors is that we should not allow our political biases to influence our investing decisions. The US economy is strong and resilient and has been since its inception. Keep in mind that, despite what sometimes look like the best efforts of those elected President, there is no rolling 20 year period in the history of the stock market when a broad market index would have shown a loss.
Over the next six months, a lot will be said about what electing one candidate or the other will do for the economy, but those really concerned with the performance of their investments should start from the assumption that none of it is true. Make decisions based on the financial strength and prospects of companies in which you are actually investing in, not the rhetoric of politicians, and you will be fine.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.