Election day is almost here. If you’re like me then you’re excited that we no longer have to hear ridiculous ad after ad about why one candidate is worse than the other. This election season has been especially brutal. After 3 months of hardcore campaigning by each candidate, we’ve learned pretty much every dark secret they have (remind me again why anyone would want to be President…). Throughout the debates, numerous questions have been fired at each candidate to figure out who would be the best President. The question that savers and investors should be asking is which candidate is best for my finances?
Status Quo or New Regime?
Anyone who has been following the election knows that Clinton has led Trump most of the way. At least that’s what a majority of the polls tell us. So what impact would a Clinton presidency have on the market? At least in the short-term, very little in my opinion. Now keep in mind that I’m not a professional and those whose job it is to predict the market have a very poor record of doing so. With that said, many believe a Clinton presidency will essentially be a third Obama term. What does this mean for the stock market? Status quo. Business as usual.
Investors like consistency. Change creates fear, which causes people to do irrational things. Which brings us to Trump. Politics aside, a Trump presidency creates fear in investors. At least in the short-term. This is because no one really knows what policies are going to change and if he’ll be able to make the changes he wants. Unlike Clinton where, good or bad, investors feel like they know what they’re getting, no one knows with Trump. This creates uncertainty, which leads to fear, which leads to investors making emotional decisions to sell out of stocks in the short-term.
Just this last week, the S&P 500 was down nearly 2%. Could this have had anything to do with news that the FBI reopened their investigation into Clinton’s emails? Clinton was showing a big lead in the polls prior to this news coming out. However, that once large lead is now down to 2 points per Real Clear Politics. Are investors fearing a change in presidential party could upset the stock market?
Republican vs. Democrat
Market volatility in an election year is not unusual. The real question is, which party is better for the stock market long-term? While the market has done well over time under both parties, it’s faired slightly better under Democrats. The percentages vary depending on the time frames you look at. In the graphic below, the market has returned 10.3% under Democratic presidents compared to 7.5% under Republican presidents since 1945.
Is this really correlated though? Studies have shown no real correlation to market returns and political party in office. If you think about it, this makes sense. As humans, we naturally try to simplify complex scenarios in order to better explain them. But the stock market is not simple. A number of factors can influence returns. Business cycles, corporate profits, valuations, and a myriad of other factors can all influence returns. A sitting president can impact some of this through policy, but certainly not all, or even a majority, of market returns can be attributed to the President.
So is it luck then that the market has performed better under Democratic presidents than Republican? You could make a case for this. Just look at recent history. G.W. Bush had the worst timing you can imagine when it came to taking over the Presidency. Bush’s regime began right when the tech bubble was about to burst. Couple that with the worst terrorist attack on American soil, and you had about the worst first year as President one could imagine. Furthermore, many contend that the tech bubble build up was the doing of the Clinton administration that preceded Bush.
On the other hand, the aftermath of the housing bubble was left for the Obama administration to deal with. The housing bubble fostered under the Bush administration, however the subsequent recovery largely benefited financial assets which has led to good market returns during Obama’s tenure.
The point is, it’s difficult to tell which administration’s policies, if any, are impacting market returns. Policies put into place by an administration can certainly have an impact on returns, but it’s difficult to say when the policies of one President begin to make an impact and the policies of the predecessor begin to wear off.
Invest for the Long-Term
What should you do with your money then? The answer is simple. Keep doing what you’ve been doing. Invest for the long-term. Don’t move your money out of stocks now because there is some volatility over the election. Once the election is over, we’ll all go back to our normal lives with half of us complaining about the current administration and the other half blaming someone else. Life will go on and the stock market will continue to go up over the long-term.
Focus on what you can control. For me, that’s my savings rate and continuing to build and diversify my after-tax investment portfolio. My after tax, after 401k savings rate has gone from less than 10% to 35% this year. I plan to get to 40% early next year, with the ultimate goal being 50%. This is something I can control. Instead of worrying about who is going to win the election, I’m focusing on increasing my income and savings rate.
Additionally, I’m looking at ways to further diversify my investment portfolio. Real estate is an area where I do not have much exposure in. Being a landlord doesn’t appeal to me, but I’m still able to invest in real estate through companies like Fundrise. I recently came across Fundrise and was pleasantly surprised they do not require you to be an accredited investor (annual income of at least $200,000 ($300,000 combined if married), or a net worth of $1 million). Yet another reason for my goal to become a millionaire. Becoming an accredited investor will give me more investment opportunities to help further diversify my portfolio.
Readers, is the recent volatility in the market scaring you off? What are you doing with your money now? Where do you see the stock market going?