Forbes – August 17, 2020

JPMorgan analysts said a Trump victory would cause “markets to fall further,” while Barclays estimated that the S&P 500 could drop “11% to 13%.” BMO believed Trump would cause investors to get “jittery.” Most dramatically, a Wedbush analyst predicted the S&P 500 would fall by half if Trump implemented his policy platform.

None of this came to pass, of course. Stocks soared after the November 2016 election, and continued to perform well through most of the following four years. Equity markets recovered in record time from the Covid-19 bear market. Investors who let their politics inform their portfolio decisions sacrificed significant returns.

“Too many people are active investors, thinking that they can get a jump on the election news and make great money,” says Santa Clara University professor of finance Meir Statman.

With the 2020 election nigh, similar patterns are emerging. Commentators are pontificating about which candidate would be best for Wall Street, predictions that feed into our own political biases. You’d do well to ignore anyone waving around a crystal ball.

Avoid Easy Presidential Election Narratives

You can quickly sketch out a reasonable-sounding rationale as to why investors should cheer Donald Trump’s re-election or a Joe Biden presidency.

Optimal Capital’s Frances Newton Stacy told Yahoo Finance that the economy would reopen more quickly under a second Trump administration than it would under a Biden presidency, as Trump would most likely maintain a policy of low taxes for businesses and households. Companies could see greater profits, according to Stacey, as President Trump kept rolling back pesky regulations. Stock prices would keep climbing.

But former Barron’s editor and President Ed Finn, while acknowledging that equities may decline in the immediate aftermath of a Biden victory, believed stocks may ultimately deliver total annual returns of 15% over the next four years should the former vice president be elected, thanks to his pro-trade and pro-immigration policies.

In fact some Wall Street executives supported Biden’s addition of California Senator Kamala Harris to his ticket because she’s seen as a moderate choice on Wall Street regulation than, say, Senator Elizabeth Warren.

While this all makes a bit of intuitive sense, real life is much more complicated.

Don’t Miss Out on Gains Because of Politics

Take Wall Street’s purported worst-case scenario: a Democratic sweep of Congress and the White House.

CFRA Chief Investment Strategist Sam Stovall echoes Stacy’s observation by noting that such an outcome may result in increased corporate and personal taxes, along with more regulation in several sectors of the economy, including energy and health care.

In fact, the five times Democrats have enjoyed such an election “trifecta” since WWII, stocks dropped by an average of 2.4% in the month when the election took place. Call it a mini-tantrum. Yet the S&P 500 went positive, on average, by December, and gained an average return of 10.4% in the first calendar year of each “trifecta.” Most recently, it returned almost 24% in 2009 under President Obama.

Despite the hype, it can be hard to notice when one administration ends and the next begins by looking at what happened to investors. Here are the last eight annual total returns for a hypothetical portfolio comprising 60% stocks and 40% bonds:

  • 2013: +17.6%
  • 2014: +10.6%
  • 2015: +1.3%
  • 2016 : +8.3%
  • 2017: +14.2%
  • 2018: -2.5%
  • 2019: +22.2%
  • 2020 (year-to-date through 7/31): 5.0%

Data from Morninginstar Direct. Funds rebalanced monthly, stock portion comprises the S&P 500 Index, bond portion comprises the Bloomberg Barclays US Aggregate Bond Index.

It’d be easier to bag flies than suss out which four years were helmed by a Wall Street-hating liberal and which by an anti-trade conservative.

While the S&P 500 has returned 11% under Democrats and just 7% under Republicans since 1945, according to Stovall, much of that difference can be traced to the stock market bubble burst in the beginning of President George W. Bush’s first term, and the Great Recession that ended in his second.

Pundits and their puffery should be discounted.

Curb Your Political Bias

Part of the reason we buy into these narratives is that our so-called partisan perceptual screen determines so much about how we see the world.

In a paper published on the online journal SSRN, three academics used the investor social platform StockTwits to identify Republican users (keywords included “MAGA” and “liberal media”), and then observed how they felt about investing as the market tanked in February after the Covid-19 outbreak.

They found these Republican investors were optimistic about stocks that performed poorly during the downturn, believing the market recovery would be quick, and were more pessimistic about Chinese equities, like Baidu and Alibaba, during the initial outbreak of the pandemic in the U.S. during March and April, but not earlier in the year as the virus spread throughout China.

This dovetails with research by a quartet from the MIT Sloan School of Business published in NBER who found that Republican investors, buoyed by the 2016 election, increased their stock holdings over the following six to nine months, while Democrats were more likely to embrace their pessimism and rebalance into safer assets, like bonds and cash .

Political Views and Economic Behavior Are Different Beasts

Most people don’t actually change their financial lives based on who is in the White House. You may say you’re more hopeful about the nation’s economic prospects if your preferred candidate wins, but those feelings tend not to filter down into your individual fortunes.

A research paper by Atif Mian, Amir Sufi and Nasim Khoshkhou showed that while people’s view of the future is shaped in part by their politics, this bias doesn’t actually cause people to behave as if they’re about to earn a bunch more money. They did find, however, that political views have hardened over time as we’ve become more partisan: Republicans living the same zip code as Democrats were more optimistic about the economy after 2016, for instance.

Remember that the next time you hear someone say President Trump or Biden would be better for their portfolio, or that they’re burying gold in the backyard because their candidate lost. It’s mostly just talk.

“Experts know that people expect answers so they provide them, perhaps by flipping coins,” says Statman. “They are not held accountable.”

No one can predict the future, and you’ll be better off in the long run if you separate your politics from your investing for good.

By Taylor Tepper, Forbes Staff

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