By now the U.S. population has been inundated with political ads and the opinions of countless political analysts. We have been presented each candidate’s positions on issues such as national security, immigration, health care and, of course, the economy. There is no doubt the nation is divided on these topics. However, there is one thing on which everyone seems to agree: If their party does not win the election the opposing party will certainly cause the market and economy to suffer.
Every four years we hear the common argument that political party X will destroy the economy or crash the market. This rhetoric tends to make people worry around election time. It can be difficult to stay on track with your retirement investments when you hear the doomsday news that partisans forecast in the media. Some people are so convinced a disaster is just beyond the polling booth that they pull their money out of the market completely. Of course, this action only increases market volatility leading up to the presidential election.
We hear the political noise every day, but what is the truth? Which political party does the market really prefer? The answer is neither. That’s right, all the back and forth you are hearing is not supported by facts at all. The truth is that there have been 28 presidential terms from the year 1900-2012. Fifteen of those terms were controlled by a Republican president while thirteen terms saw a Democratic president. Let’s take a look at the Dow Jones Industrial Average (DJIA), which was created in 1897. The average posted positive returns 13 out of the 15 terms in which the president was a Republican and 10 out of the 13 terms that the president was a Democrat. This means that the majority of the past 28 presidential terms has seen a rising DJIA regardless of which party occupied the Oval Office.
So, what really drives the market? Fortunately for us, it’s not the politicians. Consumers and businesses have a far greater impact on the economy than the government. Federal, state, and local government spending makes up only 17.7 percent of our country’s gross domestic product (GDP). On the other hand, private consumption, private investment and foreign trade make up 82.3 percent of GDP. This means that you, me, our employers and the businesses with whom we spend our money are really in control of how the economy and the markets perform.
Overall, the market doesn’t really care which political party controls the White House. All it really wants to know is who it’s going to be dancing with for the next four years.
As is the case in many other aspects of our lives, we get frightened around election time because we fear change. There are certainly many events that can disrupt the market, a presidential election being one of them. However, if you have a financial advisor who helps you cut through the confusion and create a clear plan for your financial future then you are much more likely to stay on track during times like these. No matter which candidate wins, those of us who are not yet retired will have to get up and go to work the next day in order to continue building towards our goals.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.