Why You Shouldn’t Worry about the Election
On November 8, we will vote to decide the future leader of our country. We will choose our commander in chief. Our head of government. Our most visible icon.
We will vote for the next President of the United States.
One thing we won’t be doing, however, is deciding what the markets do. We won’t be voting whether the markets go up or down. We won’t be voting on your investment portfolio. The markets, thankfully, are far too sophisticated to be determined by one person or one event.
Recently we’ve seen a lot of hand-wringing from investors worried about the upcoming election. Many people have told us, “I’m afraid to make any financial decisions until after November.” The thinking goes that once we know the name of our next president, we’ll be able to predict what the markets will do. Only then should we make any decisions.
However, this reasoning is flawed. Here’s why:
No one actually knows what will happen to the markets after the election.
Whether the winner is Hillary Clinton or Donald Trump, we can try to predict what the effect will be, but no one actually knows. That’s because …
We Don’t Know What Each Candidate Will Do in Office
Guesswork is a risky business. While we can guess what Trump or Clinton will do, no one knows for sure. Frankly, most politicians have become infamous for being vague about their plans.
Then too, presidents have a habit of saying one thing on the campaign trail, then doing something different while in office. That’s because ideology often gives way to practicality once politicians actually have to get things done. Compromises have to be made and unforeseen circumstances responded to.
In other words, campaign promises often take a backseat to political necessity.
The Markets Respond to More than Just Who Occupies the White House
Let’s pretend for a moment that we do know exactly what each candidate will do. Sounds great, right? We can make all the right decisions based on that knowledge.
But here’s the truth: the markets move for no man or woman. No one principle governs them; no single event determines their destiny. The markets are complex, because so many things can affect them. The President is just one person. Similarly, the election is just one event. An important one, true, but the markets react to thousands of events throughout the year. One event does not control them … just as we shouldn’t let that one event control us.
There’s another reason why some people refuse to act until after the election. It’s called …
Making financial decisions based on emotion is never a good thing. Too often, we let emotions get in the way. Emotions can prevent clear thinking and make us react impulsively.
Therefore, when people say, “I’ll wait till after the election,” or “I want to do X because I’m afraid President Y will be elected,” they are making an emotional decision instead of a rational one. We think the main emotion is fear. Fear that their preferred candidate will lose and the other will win. Fear that everything is going to be doom and gloom.
Don’t believe us? Let’s take a little quiz. Below are the last seven presidents of the United States, with their political party next to their name. Look at each name and guess whether you think the S&P 500 went up or down during the first year of their presidency. Write your guess in the space provided, if you like.
|President||Party||Markets Up or Down?|
|Richard Nixon (1st term)||Republican|
|Richard Nixon (2nd term)||Republican|
|Ronald Reagan (1st term)||Republican|
|Ronald Reagan (2nd term)||Republican|
|George H.W. Bush||Republican|
|Bill Clinton (1st term)||Democrat|| |
|Bill Clinton (2nd term)||Democrat|
|George W. Bush (1st term)||Republican|
|George W. Bush (2nd term)||Republican|
|Barack Obama (1st term)||Democrat|
|Barack Obama (2nd term)||Democrat|
Now, maybe you will score 100% on this quiz. But we are willing to bet at least a few of the answers will surprise you. Speaking of which, here they are (each number is rounded):1
|President||Party||Markets Up or Down?|
|Richard Nixon (1st term)||Republican||-8%|
|Richard Nixon (2nd term)||Republican||-14%|
|Ronald Reagan (1st term)||Republican||-5%|
|Ronald Reagan (2nd term)||Republican||+31%|
|George H.W. Bush||Republican||+31%|
|Bill Clinton (1st term)||Democrat||+10%|
|Bill Clinton (2nd term)||Democrat||+33%|
|George W. Bush (1st term)||Republican||-12%|
|George W. Bush (2nd term)||Republican||+5%|
|Barack Obama (1st term)||Democrat||+26%|
|Barack Obama (2nd term)||Democrat||+32%|
Is there anything you didn’t expect? Maybe Reagan’s first year was worse than you thought, or George H.W. Bush’s first year was much better.
Frankly, if even one of those numbers comes as a surprise, it should be food for thought. After all, if we can’t guess how the markets did in hindsight, how can we accurately predict what’s going to happen in the future? Every president on the list above had their strengths and weaknesses, but the numbers next to their names were the result of far more: they were the result of all the events, big and little, that they could not foresee and could not control.
You might be saying, “This is hardly a traditional election”. That is true—from a likeability standpoint, both candidates are historically flawed. However, the fact remains, the markets are driven by far more than one person and one event. We often say that the president is the leader of the free world … but they still do not determine which way the markets will go.
That is why you shouldn’t get too worked up about the election—at least not with regards to your finances. As always, we should make financial decisions based on planning instead of predictions. That is the way to control your financial future. No one else controls it for you … not even the President of the United States.
If you are still worrying about the upcoming election, please give us a call. We can discuss your portfolio. We can talk about any opportunities that might exist right now. We are constantly monitoring both the markets and Washington, so if anything happens that you need to know about, rest assured that we will be dialing your number. Our job is to give you the best financial advice possible. Right now, that advice is: do not let one person or one event control what you do or how you feel. When it comes to your finances, there is only one person that matters:
As always, please let us know if you ever have any questions or concerns about your portfolio. In the meantime, have a happy autumn … and do not sweat the election!
1 “Annual Returns on Stock, T.Bonds and T.Bills: 1928 – Current,” Stern School of Business, NYU, accessed October 3, 2016. http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html