Video courtesy of Dave Brown, CIMA®, CPWA®.
The ballots have been counted, and the dust has settled (mostly). Former Vice President Joe Biden was declared the winner of the election and will be inaugurated as the 46th president of the United States on January 20, 2021. Regardless of one’s political views, this has been an election season unlike any other in modern times. The good news is that more people voted in this election than ever before. Furthermore, predictions about post-election social unrest and extreme financial market volatility turned out to be wrong. Speaking of predictions, it is worth noting that there are political pundits and “experts” who predict dire consequences for the markets if one candidate or another wins in most presidential election seasons. History proves them wrong, time and again, so we would all do well to remember that pundits make scary predictions because it is more titillating and generates higher ratings and more re-tweets than calm, measured assessments. Since we prefer the relaxed, measured approach, we offer the following insights and resources to help cement the notion that investors benefit from staying invested in the face of uncertainty, no matter which political party controls the White House or Congress.
The anticipation leading up to elections and during the “Monday morning quarterbacking” sessions that follow often includes questions and concerns about how financial markets will respond if one party or the other gains control. The reality is, the outcome of an election is only one of many inputs to the market, and neither the President nor Congress has the power to directly “manage” the economy. Yes, specific policies or programs influence corporate America to an extent, but the U.S. and global economies are incredibly complex. While presidents and Congress may impact markets, other factors, from technology developments to changing consumer preferences to international competition—not to mention a global pandemic, are far more critical.
There may be some “likely” changes with a Democrat in the Oval Office (renewed efforts to pass another pandemic relief package, an emphasis on “green” energy projects, a shift in trade policies that involve fewer tariffs, for example). If the Republicans retain control of the Senate, the likelihood that high-income earners’ tax rates will increase is significantly reduced. The market will take this into account and will move on. Uncertainty about the policies and the timing of their implementation has more of an impact on market volatility than the actual systems themselves, at least most of the time.
It’s natural for investors to look for a connection between who wins the White House and which way stocks will go. But the article and video we offer below show that over nearly a century, the stock market has trended upward across administrations led by both parties, and both Republicans and Democrats have presided over down markets and recessions. Shareholders invest in companies, and companies focus on serving their customers and growing their businesses, regardless of who is in the White House. People will continue to pursue ways to make money through various business ventures, regardless of which political party is in power. Capitalism has always promoted winning ideas over the long-term and has rewarded investors that stayed invested.
We emphasize that the U.S. economy has shown remarkable resilience for 100+ years, along with the ability and determination to innovate and generate profits over the long-run. While market volatility does tend to increase leading up to elections, and this time that heightened volatility may persist for some days or even weeks after the polls close, long-term investors should not adjust their portfolios based on short-term phenomena. The impact of a single election is relatively small in terms of the life ahead of you that motivates your investing. It is essential to focus on the benefits of a long-term investment approach on Election Day and every day.
Update: Since publishing this article, Dimensional released a related video. Click here to watch, "Elections and the March of Markets".
