How might a presidential election impact investment decisions?

With President Joe Biden’s State of the Union message, the 2024 presidential race officially is kicking into high gear. What impact might the election of a president have on investment decisions? One way to view that question is through the lens of history.

When the Bank of New York okayed a loan to the U.S. government to help pay President George Washington’s salary ($25,000 a year), it marked the moment that the business of business and the business of government became inexorably linked.

Government borrowing has been going on ever since and investors forever are looking at the actions of government for hints of how and where best to put their money. This guessing game becomes even more intense every four years as we try to cipher how the presidential election might impact our investment decisions. There’s nothing wrong with that notion. Investors should naturally consider varying government policies and their impact on different sectors, as government support or restrictions can significantly affect market dynamics and investment outcomes.

Government support not a good predictor

But they must bear in mind, perhaps contrary to the popular narrative, investment success based on government support or opposition is unpredictable.

Take, for example, the case of U.S. Steel, whose stock initially rose due to anticipation of government-imposed steel tariffs in 2018. Despite the optimism, the stock, and those of like companies, dropped significantly after the tariffs were implemented.

Then there is the stock in Exxon – which despite being out of favor with the current administration – as are most fossil fuel companies – has quadrupled in value.

“While presidents may have an impact through policies, the overall effect on market returns is not significant enough to warrant making investment decisions based on political affiliation,” says Apollo Lupescu, vice president of Austin, Texas-based, Dimensional Fund Advisors.

In a recent webinar titled “Taking Stock in Elections: Unveiling the Stock Market’s Political Dance,” held by PBMares Wealth Management, of Williamsburg, Virginia, Lupescu through some serious shade on many of the media and consumer tropes about how economic markets move in response to government policies and election year campaigns (Democrats are better budget managers, Wall Street favors Republican administrations etc.).

Emotional response to election results

What about the emotional impact of an election or other political events on investments? “The emotional response of investors to political events and party control can influence perceptions of market performance,” Lupescu said. “Despite data indicating no significant difference.”

Lupescu presented data that showed the stock market produced positive returns in 20 of the last 24 presidential election years – dating back to 1932.

“If anybody says election years are terrible for the market, that’s simply not what the data show,” he said. “In fact, the overwhelming majority of those years the market went up.”

The issue of what’s moving the market in an election year is much more complicated than simply an ongoing presidential campaign. Other factors such as the state of the economy, interest rates, inflation, and corporate profits have a greater bearing on broad stock market performance, Lupescu said.

“Analysis of market performance under different presidents since 1969 reveals no consistent correlation between a president’s political affiliation and market returns,” he said. “It suggests that other factors are more influential.”

But what about spending and borrowing? Surely the budgetary decisions a presidential candidate makes or proposes has an effect on economy. Currently the national debt is around $32 trillion dollars so that’s going to have an impact on the economy.

Viewing the sustainability of debt

Well, yes and no, Lupescu said. In the last 30 years or so the U.S. has increased its debt eight-fold. But while the U.S. has huge debt and interest rate obligations, there’s more than one way to look at it.

“The absolute true measure of how sustainable is that debt is how much it actually costs us as a country,” he said. “Not the total number itself but what percentage of our economic output do we spend on paying interest on that debt.”

Surprisingly, Lupescu said, the percentage of gross domestic product that went toward interest payments in 1990, when the national debt totaled $4 trillion, was about 3.2%. But it turns out that at the end of 2023, with the debt at a staggering $32 trillion, only 2.4% of the country’s economic output is used to pay down debt.

“In other words, even though we owe so much more, the actual financial burden on us is a lot less,” he said. “We’re exactly where we were in 1999. So, the economy is a lot bigger and having a substantial debt is not necessarily crazy. The headlines will mention this big, bad $32 trillion in debt but we don’t have to pay that all at once, just as you don’t have to pay a 30-year mortgage all at once.”

Politics and political affiliations can be deeply emotional, Lupescu said, and can affect investment decisions.

“It’s okay to acknowledge those emotions,” he said. “But the wisest investors try to disentangle their emotions and make their decisions pragmatically, based on data and evidence.”

The bottom line?

“There’s certainly a lot more important things going on in the world than a U.S. presidential election on which to base investment decisions,” Lupescu said.

Doug Bailey is a journalist and freelance writer who lives outside of Boston. He can be reached at doug.bailey@innfeedback.com.

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