Why Politics and Portfolios Don’t Mix

Signs that election season is heating up are everywhere. TV and radio offer a steady drumbeat of ads for or against candidates, political yard signs are sprouting up on lawns across the country, and many social conversations are taking on a political tone. The elevated engagement is natural. Elections are important. They allow us to voice our opinions on candidates we feel best reflect our personal views on the topics that are most dear to us.  

Not surprisingly, the importance of choosing leaders to represent us in Washington can lead to heightened emotions as debates over candidates and policy in the political realm take on added urgency. Unfortunately, it can also lead to poor decisions when applied to investing. While navigating these strong opinions can be delicate, it’s important to remember that long-term financial success is not based on whether the candidate or party that most closely aligns with your political viewpoints wins an election. In turn, your financial goals should not change based on which party controls the levers of power in Washington.    

To illustrate the perils of making significant changes in your portfolio based on election outcomes, we took a look back at every U.S. midterm election since 1950 and found that the markets don’t see blue or red — both political parties have presided over periods of strong returns, as equity performance is primarily driven by the economic cycle, not politics. 

It’s the business cycle, not the election   

Presidents and party control of the legislature can have an impact on the near-term prospects of specific industries; however, that effect is usually fleeting and far from certain. Oil prices during the Trump administration offer just one example of this dynamic. Although the administration eased regulations and sought to create a more favorable regulatory backdrop for the fossil fuel industry, oil prices sagged due to the lack of demand during the COVID shutdown, and shares of oil companies sank. Fast-forward to the Biden administration, which has favored alternative sources of energy investments, and the results have been flipped. Oil prices have skyrocketed thanks to increased demand, and energy companies have booked record profits. This illustration serves as a reminder that regardless of policies and political agendas, stock market returns are more closely tied to economic activity than the party in control of the White House or Congress.   

Stock market valuations are typically higher later in the business cycle. So as you might expect, politicians of either stripe elected at the beginning or middle of a business cycle — when the economy is experiencing above-average growth rates — have historically presided over stronger returns than those voted into office late in the cycle, when economic growth is receding from peak levels. This is illustrated in the chart below.