Why Politics Should NOT Impact Your Investment Strategy
The 2020 election is swiftly approaching, and with it comes the political messaging. There will be creative communications throughout the campaigns, some of which will give us pause to consider, some a smile and others internal angst, but none will tell us where the stock market will go on November 4, 2020. In fact, none of the authors of these messages can rightly claim to have anything but an educated guess about what Wall Street will do once the polls close. But I am here to stake one claim that I think will be astonishingly accurate, so here goes: On Wednesday, November 4, 2020, I predict that Apple will make iPhones, Clorox will make bleach, Tesla will make electric vehicles and Honeywell will make thermostats.
Revolutionary thinking? Probably not, but given how much trepidation many investors are feeling these days it’s worth taking a step back to realize that no matter who wins the White House and regardless which party holds Congress, the great American economy will continue to evolve, adapt and move forward. Why am I so bold in this manner? Let’s take a look at history and the facts it reveals.
First, looking at every other presidential election year, we see that the stock market routinely does two things: 1) it fluctuates, sometimes sharply and 2) it changes components, both on the exchanges themselves and within the major indices such as the S&P 500. Why am I stating the obvious? It’s because all too-often when emotions run high and clarity runs low, we humans miss the most obvious and important things while being distracted by the headline. To parallel my own folly, while I’m busy finding a radio station in the car I miss the exit sign and end up in Timbuktu!
Let’s look deeper at these two elements. Regarding fluctuations, the first thought might be that stocks fluctuate more in presidential election years, but, except for 2008, that theory doesn’t hold water. Since 1991, the CBOE Volatility Index (VIX) has averaged 19.4. In presidential election years, it has averaged 20.9. If you pull out 2008, the average has been 19.3. We can recall that 2008 had a lot more going on than just a presidential election to drive outsized volatility. The real estate meltdown, banking crisis and domestic recession were all far larger contributors to the VIX’s average reading of 32.69 during that year.
Next, let’s look at changes that have taken place within the S&P 500 index during presidential election years. In 2000, five components within the index changed, all due to shrinking market capitalizations. The names included Bethlehem Steel, Owens-Illinois and RiteAid. None of these had to do anything with the presidential election of 2000. In 2004, no changes to the index took place – a highly unusual thing given that since 1967 an average of 25 stocks per year change within the S&P 500. In 2008, surprisingly there were only five component changes, but not surprisingly, all of them were financials including big names Lehman Brothers, Fannie Mae and Freddie Mac. Ironically, Owen-Illinois was added back INTO the index in 2008. In 2012, there were 18 component changes, with notable names such as Sears and R.R. Donnelley (ah the good ol’ Yellow Pages) removed due to shrinking market capitalization, and in 2016 there were 30 changes, including the removal once again of Owens-Illinois! In 2016, 18 of the 30 component changes were due to merger activity with two being removed due to market capitalization issues.
The broader point is to illustrate that the stock market changes constantly and for various reasons but does not move with specific correlations to presidential election years. Politics aside, change is a natural and dynamic phenomenon, welcomed by those seeking improvement and growth, but feared by those seeking comfort and convenience. It is as the great economist, Joseph Schumpeter, so succinctly stated, “Creative Destruction”.
What conclusions can we draw from history and data? Politics matter when it comes to supercharging emotions, highlighting differences and maybe even choosing what color shirt we will wear on election day, but they should not matter when it comes to your investment strategy. Whichever party resides in the White House or controls the halls of Congress, America’s corporations will do as they have always done. They will adapt, adjust and grow. Those that do not such as Sears, Lehman Brothers and Bethlehem Steel will go by the wayside to be replaced by America’s next generation of corporate creativity.
No matter how you vote on election day, be confident that the following day Apple will make iPhones, Clorox will make bleach, Tesla will make electric vehicles and Honeywell will make thermostats. When it comes to investing, you must remain calm and keep you your emotions from impacting your approach. Working with a financial advisor can help you create an investment strategy that matches your time horizon and risk tolerance and help you stick with that plan even while navigating emotionally charged current events. To have a conversation about your financial goals and how we can help, please reach out to a Girard advisor.
This article is for general information purposes only and is not intended to provide legal, tax, accounting or financial advice. The information in this article, and any opinions expressed therein, do not constitute a recommendation or an offer to buy or sell any security or financial instrument. Viewers should consult with their financial and/or legal professionals before making any financial decisions.
The S&P 500 and CBOE volatility indexes referenced are not managed and cannot be invested in directly. Past performance is no indication or guarantee of future results.