The Presidential Election and the Market

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The current Presidential election has been more entertaining than most in recent history, but it has also been one of the more troubling. Emotions have run high, and many clients have asked what they should do in anticipation of either Donald Trump or Hillary Clinton becoming President.

Whether the next administration is Democratic or Republican is almost irrelevant as far as the market is concerned. Many corporations make political contributions to both parties. What is more important to the market is if one party or the other has a landslide victory and gains a huge majority in both the House and Senate. This could cause rapid and dramatic change in laws governing taxes and corporations, and the market doesn’t like change. The market tends to respond well when there is a good balance between the political parties, because any change tends to be moderate and gradual.

The Founding Fathers may have had this in mind when they created our tripartite system of government, with all its checks and balances on power. Presidents generally have a limited ability to single-handedly influence markets or the economy. It is Congress that is directly responsible for budgets and spending, and Congress itself has often been divided. Since 1945, there have been only 13 years when both chambers of Congress were controlled by the same party.¹

Since 1928, only four presidential election years saw negative returns, and the average election year return on the Standard and Poors 500 index of large U.S. companies has been only slightly lower than the average return for all years.² One reason for the stability of returns may be because any governmental policy change takes time to affect the economy. Policy changes made today may not produce tangible results in the economy for several years. Consequently, presidents take office under the economic conditions that were created, good or bad, by their predecessors.

This Presidential election has been more heated and contentious than usual. In many ways, the U.S. election and “Brexit”, the United Kingdom’s referendum to leave the Eurozone, are related. In both the U.S. and in Britain, there is a growing wealth and income gap between rich and poor. The recovery from the recession in 2008 and 2009 has been enjoyed primarily by the ultra-rich, with the middle and working classes losing ground financially. This has created great bitterness and frustration, and a tendency among voters to blame refugees and immigrants, who are victims themselves. Whoever becomes President will have to deal with these inequities or face continued political upheaval.

Investing in the market or in real estate have been one of the few ways that average people have been able to participate in economic growth and opportunity. Creating a globally-diversified portfolio has been key to weathering the many challenges that we face today. Yesterday it was “Brexit” — next week it will be another crisis. In a typical diversified account, the total investment in the United Kingdom would have represented only 6 to 7% of the holdings, and other asset classes in the account would have continued to grow well. Doing just the opposite of “putting all your eggs in one basket” helps you to get more consistent performance, and more downside protection.

The most successful investors tend to be those who stick to their long-term plans and don’t panic and pull out of the market at every downturn. “Brexit” was a good example of this. Although the initial reaction was doom-and-gloom and a significant hit on global markets, the European market recovered to pre-Brexit values within a few days, and last week the U.S. market had the best one-week performance for the year and hit a new record high.

Your long-term goals should never depend on which party or candidate wins an election. Those who stay invested and don’t make changes based on election results will probably fare the best.

¹ United States Election Project; Data Source: DFA Returns 2.0

² Morningstar Direct November 2015. U.S. stock market return represented by the S&P 500 index. Past performance is not indicative of future results. All investments involve risk including loss of principal. Indexes are managed baskets of securities in which investors cannot directly invest.

This commentary reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc employees providing such comments, and should not be regarded as a description of advisory services provided by our firm or performance returns of any our firm’s clients. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.