aIf you read yesterday’s post you’ll understand Market Thinkingin the final week of my regular contributions to Nasdaq.com, I am re-emphasizing some of the most important concepts and ideas that I believe are important for individual investors to understand. Given that we are already in the never-ending battle to get to the presidential election later this year, even if this wasn’t the final week, I would almost certainly have written something on the topic of politics and investing.
It is often said that the first casualty in war is the truth, but this noble notion is heavily tarnished in elections. Politicians are always somewhat picky about the facts, but this tendency is exaggerated in important elections, and both camps believe that this year’s election is a very important one. Each will claim that they represent the “real” America, while the other is trying to destroy it, and that electing their opponent will bring about economic collapse and other disasters.
Fortunately, and unsurprisingly, neither is telling the truth.
One of the greatest features of the US economy is its resilience. The history of the United States, and indeed the history of most developed Western countries, is a story of economic growth and success not because of politicians but in spite of them. Crises have come and gone, some caused by political decisions and some helped to recover, but the overall wealth of countries has grown relentlessly for centuries. This is not unique to the US: the free-market oriented US model has been hugely successful, but so have the more regulated, welfare-oriented economies of Western Europe and Scandinavia.
As long as people are free to pursue profits however they see fit, and as long as capital is allocated roughly correctly, there will be economic growth that benefits society as a whole. There are questions about how evenly those profits will be distributed, and what exactly a fair share is, but ultimately we all benefit to some extent from economic growth. This fact is recognized in America on both sides of the political divide. It may not seem like it now, but there is far more that unites Americans than divides them, at least when it comes to basic economic beliefs.
Perhaps that is why the actual data shows that many of our preconceived notions about the impact of who is in the White House on the economy are completely wrong. We start from the false assumption that the two parties have very different attitudes toward the economy. Republicans are generally viewed as more pro-business and therefore better for the economy than Democrats, but the facts tell a different story. In the period after World War II, GDP growth and job creation were both better under Democratic administrations.
But strong arguments can be made that these numbers are misleading, due to the normal lag between when a policy is signed into law and its effects being felt, or that they are statistical outliers caused by several economic crises under Republican administrations that are not the fault of the White House, such as the COVID-19 pandemic under President Trump or the credit crunch under George W. Bush. Furthermore, fiscal decisions, the most fundamental economic policy decisions, are made by Congress, not the president.
Taking all this into account and applying simple logic, it appears that which party controls the White House has essentially no impact on the stock market.
Yet many investors still allow political bias to influence their investment decisions. When Barack Obama was elected president in 2009, many staunch Republicans, convinced he was a devout socialist who would destroy American business, sold their stock investments. They missed out on one of the best eight-year periods in history when major market indexes performed better. Similarly, some believed Donald Trump would crash the economy through inexperience, a disorganized management style, or just plain incompetence. They, too, missed out on some spectacular market rallies, even after the pandemic caused a major collapse.
The overall lesson for investors is to not let political bias affect your investment decisions. The US economy has been strong and resilient since its inception. While it may at times seem like the best efforts of those elected to the presidency, remember that there has never been a 20-year period in the history of the stock market where the broad market index showed losses.
There will be a lot of talk over the next six months about how electing either candidate will affect the economy, but anyone who really cares about the performance of their investments should start from the premise that none of it is true. Make your decision based on the financial strength and prospects of the companies you actually invest in, rather than the rhetoric of politicians, and you’ll be fine.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
