By: Sean Gallagher, CFP®
We've all been there - stuck at the dinner table with the overly political uncle who's had a few beverages and is ready to dive into the latest headlines and hot-button issues. You know the one: every family gathering turns into a political debate, and you're left navigating a minefield of opinions while trying to enjoy your meal. Whether he's passionately defending his views or eagerly challenging yours, it's hard to escape the tension that hangs in the air. If no one comes to mind, perhaps you're that "uncle"?
When that conversation turns to politics and the stock market, especially during a contentious election year such as 2024, let's provide some ammunition to help facilitate that discussion.
In finance and economics, there's a common belief that the political party of the sitting U.S. president has a significant influence on the stock market's performance. However, upon closer examination, it becomes evident that the relationship between the stock market and presidential party affiliation is largely unrelated. Despite popular perceptions and occasional rhetoric suggesting otherwise, evidence consistently demonstrates that the stock market's movements are driven by many factors, with political party affiliation being just one small piece of the puzzle.
The Evidence
Let's get straight to the facts. The chart below illustrates the growth of $1,000 invested in the S&P 500 (U.S. Large-Cap Stock Index) from 1933 through 2023. It also highlights periods with a Democratic or Republican president.
Except for occasional choppy returns in the 1930s, 1970s, and early 2000s, the chart consistently depicts a journey from San Diego to Maine. Moreover, we observe numerous periods of solid returns in both blue and red areas, suggesting no political bias in the stock market. Merely holding onto your $1,000 investment in the index would result in $21,560,033 by the conclusion of 2023.
Let's pretend your uncle doesn't believe in investing when the opposing political party is in office. "You can't trust them to make the right decisions with your money," he tells you while slamming his fist on the table. The chart below shows the difference in outcomes for only investing during specific presidential party years.
As you can imagine, staying invested over the entire 70+ year period from 1953 to 2023 produces the best outcome, but the shortfalls from investing only during your preferred presidential years are astonishing.
Another classic line includes, "The economy was better when my political party was in office." The chart below demonstrates how consumer confidence tends to flip based on the political party in office, with Republicans feeling more confident during a Republican presidency and vice versa for Democrats.
The stats below each timeframe underscore the relative consistency in stock market returns and Real GDP Growth (a broad measure of economic growth). These presidents were not devoid of economic challenges, such as the Tech Bubble, the Great Recession, and the COVID-19 Pandemic. Still, regardless of political party, the economy's resilience shines through. I tend to point out the Obama and Trump administrations in this chart – while S&P 500 returns and Real GDP growth are similar, there are considerable differences within the consumer confidence level of each political party during those years.
What Really Affects the Stock Market?
While it's natural for investors to look for a connection between the party in the White House and the direction stocks will move, it's essential to focus on what truly affects the stock market.
Economic Factors: The state of the economy - things like jobs, consumer spending, and inflation - plays a significant role in shaping stock market trends. While government policies can have an impact, they're just one piece of the puzzle.
Corporate Performance: The financial performance of companies is critical. Companies have a commitment to their customers and shareholders and will work to bolster their bottom line no matter what parameters the president sets for them.
Global Influences: What's happening worldwide can also sway the stock market. Trade deals, international conflicts, and global economic trends all play a part.
Monetary Policy: Decisions made by central banks, particularly the Federal Reserve in the United States, regarding interest rates, money supply, and quantitative easing have a profound impact on financial markets. Politics should not influence these decisions - they are about keeping the economy on track.
Investor Sentiment: Emotions play a massive role in finance! Investor confidence, fear, and optimism can push stock prices in different directions. While the most recent chart above illustrates changes in how people perceive the state of the economy based on the president in power, consumer confidence typically flip-flops based on the political party you prefer.
What Should You Do?
What's the key takeaway for investors trying to navigate the markets? Focusing on what matters and tuning out what doesn't is essential.
Diversify Your Portfolio: Spread your investments across various asset classes, such as stocks, bonds, and alternative investments, to mitigate risks during market fluctuations.
Maintain Discipline: Adequate your long-term investment strategy during volatile market periods. Avoid being swayed by short-term political or market noise, and stay focused on your goals.
Conduct Cautious Research: Stay informed about global events and economic trends, but avoid becoming overly immersed in political distractions. Stick to fundamental investment principles, including diligent research, patience, and disciplined decision-making.
Remember, while politicians might hog the headlines, they don't hold all the cards regarding the stock market. So, next time someone tries to tell you that the market has a political preference, just smile and nod - you know better.
The foregoing content reflects the opinions of Highland Financial Advisors, LLC, and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions, or forecasts provided herein will prove to be correct.
Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses, which would reduce returns.
Securities investing involves risk, including the potential for loss of principal. There is no assurance that any investment plan or strategy will be successful or that markets will act as they have in the past.
Sean Gallagher is a CERTIFIED FINANCIAL PLANNER™ at HIGHLAND Financial Advisors, a Fee-Only financial planning firm that offers comprehensive financial planning, retirement planning, and investment management. Sean graduated from Virginia Tech’s financial planning program in 2018 and successfully passed the CFP® national exam in 2019. As a Financial Planner at HIGHLAND Financial Advisors, Sean works on developing comprehensive financial plans and investment management for all clients.