WoodTrust Market Perspectives: Political Perception

1st Quarter 2024.  

Market Review

Performance Driver Review

Market Perspectives
With the Presidential Primary season in full swing, the upcoming election is top of mind for several investors. While countless factors affect financial markets both on a daily basis and throughout presidential terms, it is not uncommon for individuals to become hyper-focused on what the polls will mean for their investment portfolios during an election year. Given the prevalence of this mindset, it is prudent to explain the root cause of the biases that exist, dispel a handful of election-related myths and remind investors what the most important factor is for building wealth over time.

The Baseline Bias
When it comes to setting the scene for how political biases arise with respect to investing, one of the most impactful ongoing studies is being conducted by Pew Research Center.1 This study focuses on the relationship between consumer confidence and political affiliation. Survey respondents are asked a simple question: “Thinking about the nation’s economy, how would you rate economic conditions in this country today… as excellent, good, only fair, or poor?”. What is cause for consideration is the significance of the spread between respondents rating the economy as excellent or good when their preferred party is in the White House. Over the four different presidencies since 2000, a respondent was, on average, as much as 3x more likely to believe the economy was excellent or good if their preferred party was in charge, regardless of financial market performance or economic data. This is flooring data and does a good job of putting the passion behind some of these biases into perspective. Often, these perceptions manifest into myths about the market that can influence an investor’s decision making and positioning.

Is perception reality? Election-related market myths…
While a plethora of myths related to elections and their impact on economic conditions and market performance exist, a few in particular seem best discussed in relation to 2024.

Myth One: Election years influence actions by the Federal Reserve.
With the Federal Funds rate at its highest level since 2001, many wonder if the upcoming election will stifle or encourage rate movement by the Federal Reserve (“Fed”). However, history shows insignificant correlation between rate action and election years. Examining election cycles back to 1980 shows that the Fed has taken rate action every single election year except for 2012, sometimes cutting rates, sometimes raising them and once actually doing both. The Fed is hyper focused on its dual-mandate of controlled inflation and full employment, not election considerations.

Myth Two: The party in power influences market performance.
The myth that is perhaps the most direct outcome of the biased perception explained earlier is that the market performs better under one political party or the other. Looking back over the 65 or so years since the S&P 500’s inception, it is difficult to glean any sort of statistical significance related to this concept. The average compound annual growth rate for a Democratic presidency is 9.8% which does beat that of a Republican presidency at 6.0%, but taking a look at the median value of the same growth rate gives 10.2% to the Republicans and 8.9% to the Democrats. The leader of the free world certainly carries substantial power, but markets have a lot of other information to interpret and assimilate as they navigate the four years of a president’s term.

Myth Three: The stage of a President’s term influences market performance.
This one has some merit. There appears to be evidence that, on average, stock market returns are better in the back half of a president’s term, but the data from term-to-term varies widely. More importantly, returns in both the front half and the back half of a presidency have historically been positive, so an investor would generally have been worse off keeping money out of the market for that period.

The Fatal Flaw
With a thorough understanding of the biased perceptions and key myths that exist, investors are rightfully left wondering what matters most. Taking a look back at Myth Three gives a good hint: regardless of the year of a president’s term, market returns were positive, on average. This means, at every stage in the cycle, there was opportunity for compounding returns and growing wealth.

This concept is not new or novel, but it is often the fatal flaw of the common investor: time in the market is significantly more important than timing the market, so stay invested. If an investor lets their perception of the president’s impact on the economy and markets influence their investment decisions, the damage to wealth creation is immense.

For the sake of example, assume an investor who recently retired put away $10,000 in 1970. This investor had a few options: 1. Invest only when there is a Democrat in the White House, 2. Invest only when there is a Republican in the White House, 3. Keep the money in the market regardless of which party controls the White House. What are the spoils? As of quarter-end, invested with Democrats only: $142,000; invested with Republicans only: $41,000; invested throughout the entire time period: $582,000.2 The answer is simple: when it comes to your investment portfolio, throw politics to the side, keep your money in the market, and let it compound over time.

In Summary
Politics are polarizing. Passion for who is fit to lead our country is what makes democracy so powerful and keeps the American Dream alive. That said, allowing one’s passion for politics to drive investment decisions can be incredibly destructive to long-term wealth building. The most successful investors keep their money in the market and let compounding do the work.  As always, we thank you for your trust and look forward to our meetings with you in the near future.

 

1Pew Research Center, January, 2024, “Americans More Upbeat on the Economy; Biden’s Job Rating Remains Very Low”

2S&P 500: Price Return Only