Episode 14 – Investing and Politics Don’t Mix

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Welcome to Market Perspectives. Today’s episode is investing in politics don’t mix. And we’re going to be talking about why it’s so treacherous to try to mix investing and politics. I’m Josh Zumbrun, I’m the director of External communications at Mercer Advisors, and I’m going to be hosting this conversation with Don Calcagni, who’s our Chief Investment Officer.

Now, Don, I think this is a topic that is fair to say is not intuitive to a lot of investors. Politics are important. And so people naturally have this instinct that if quote, “the wrong candidate gets elected, it’s going to be disastrous for their investments.” Now, before we dive into that a little bit deeper, let’s take a second to just state directly that this isn’t a politics podcast.

We’re not here to tell you how to vote. We’re here to analyze the data. And we’re thinking about this as investors. And the key message for investors is that the danger isn’t that the wrong candidate gets elected. The danger is in thinking that your politics are going to have obvious implications for your investments. So Don, to start off, tell us a little bit about the mentality and the assumptions that you often see from investors heading into elections.

Thank you Josh. It’s great to be here. And I think it’s fair to say that today we live in a world where we tend to gravitate towards our own echo chambers. We all have our own political views. We all have our preferred political candidates whom we believe should win and would do a better job running the country, and would also be better for the economy or better for markets, and by implication or by extension, would be better for our portfolios.

And we gravitate towards these echo chambers that either in social media or the news that really tend to reinforce our belief systems rather than challenge our belief systems. And so I think it’s logical that many of us would think, oh, well, I know the right answers, and I know who is going to be better for the economy or for my portfolio, and therefore I’m going to make investment decisions based on who I think would be better for the economy or for my portfolio.

And I think, Josh, when we have this discussion here in a few moments, what our listeners are going to hopefully take away from this is that the data tells a very different story, that indeed, it’s actually very challenging to draw a clear connection between one candidate, one political party, and what’s happening in the economy or in markets.

So let’s dig into that point a little bit. What does the data actually show us about this? Are there obvious effects of one party or the other being in control of the White House, being in control of Congress?

Well, I think the high-level takeaway. Josh, when we look at US market data going all the way back to the ’20s or the ’30s or the ’40s, pick your starting point in time, it doesn’t really matter. The big takeaway is that US stocks have done amazingly well under both Republican and Democratic administrations.

If we just look at more recent history under the Obama administration, the S&P 500 index averaged 16% annually during his two terms. Under President Donald Trump, it actually returned 16% per year under Donald Trump. And arguably very different administrations, very different economic policies, very different fiscal policies across those two administrations. Yet stock market returns during their administrations both averaged 16% annually. And so I just think that’s an interesting takeaway.

So I think the high level point, Josh, is go all the way back to the ’40s or the ’30s, it doesn’t matter. US stocks have averaged about 12% annually over the past 70, 80 years, and stocks have gone up under both Republican and Democratic administrations. We don’t really see a pattern between the two parties. Other than this, let me give you some simple averages.

If we actually look at the returns on the S&P 500 index going all the way back to the ’40s under Republicans, the S&P averaged about 13% per year. Very, very good, right by any measure.

Under Democrats it averaged about 10% per year. Still really, really darn good by any measure. So the Republicans, to be fair, could actually argue that stock returns have been better under Republican administrations, and that would be objectively true.

Interestingly, if we look at market returns under the Biden administration over the past 3 and 1/2 years, and if we were to annualize that, the stock market has actually returned about 13%. So Biden’s a little bit above average, even by Republican standards with respect to stock market returns.

Now, if we look at the economy, Josh, it tells a different story. So we’re going to look at real GDP growth. Under which party does the economy do better.

Well, under Republican administrations, the economy has grown by about 2.8%

annually, pretty good. Under the Trump administration, the economy grew by 1.5% per year. So a little bit below average relative to Republican administrations historically.

Under Democratic administrations, the economy has grown by about 4% annually since the 1940s. So at least when we look at the data, it is true that the economy has done slightly better under Democratic administrations than under Republican administrations. Currently, under the Biden administration, the economy has grown by just shy of about 5% annually. So by that measure, the Biden administration is a little bit above average relative to history.

Now, Josh, let me just say this before we move off of this point. The reality is that when we actually look at market returns and economic growth under Republicans and Democrats, what we observe is that none of this data is actually statistically meaningful. We just don’t have a large enough sample size to draw any reliable conclusions around whether or not one party is better for the market or the economy than the other.

It’s interesting. I mean, you’re able to find examples where it looks a little stronger this way or a little stronger that way, but in either one of them, it’s hard to know what you would do as an alternative, even if you knew that information. You could say, well, the market’s been a little weaker under these circumstances, but you wouldn’t have been better off going to cash. You still would have been probably better off with a well-diversified portfolio that was in the market.

Absolutely.

Now, why do we think the link between politics and markets might be so hard to find? I think that’s surprising to a lot of people. It just seems like elections are so important that it ought to be much easier to find clear links between the policy changes and what’s going on in markets. Why in practice, do you think it’s so hard to actually make those links?

I do believe elections are exceptionally important, but I say that as a citizen, less so as an investor. Here’s why it’s really challenging to draw cause and effect relationships between a political party and what’s happening in the market or the economy. Josh, the reality is, if a given presidential candidate has a specific policy proposal and let’s assume that candidate wins. The reality remains that president’s themselves do not pass laws. That falls to Congress.

And we have a bicameral legislature. We have the House of Representatives. We have the Senate. And rarely does the president or the party, I should say, that controls the White House. Rarely do they have full control of government. Rarely do they also control the House of Representatives. Rarely do they also control the Senate.

The reality is, it’s very, very common for a president to have a set of policies that they would like to see enacted, only to have those policies go through the sausage maker, that is Congress, and to have those policies change quite dramatically.

Before the show, you and I were discussing the Affordable Care Act, and there was a conversation where President Obama wanted to include a public option in the Affordable Care Act. Yet when the Affordable Care Act was ultimately passed, it did not include the public option.

We could look at a variety of tax legislation over the years where the same thing ultimately happened. A president had a preferred set of policy outcomes, yet by the time it worked its way through Congress, the end result was something very different than what the president had originally intended.

So trying to draw these very simplistic cause and effect relationships between a president’s policies and what’s happening in markets or the economy, I would argue that is very, very difficult. The president is not a king. They don’t pass laws. Ultimately, it is Congress that passes laws.

I think that public option example is such an interesting one, because it was going to be a government run health insurance option, basically. And so there was this concern at the time. Everyone thought, well, what is this going to do to the health insurance companies. And we don’t really know the answer to it because it got left out of the legislation in the end, and it ended up being a fine environment, actually a pretty good environment for health insurance companies over the years since then.

And it makes you realize that in order to have invested perfectly around that early Obama era, you would have needed to know that the Democrats were going to be able to pass the health care bill, but they would fail to pass this one provision that would have very important implications for this one segment of the market, the amount of knowledge that you would have to have in advance to have foresaw all that and to have invested around it perfectly, I think it actually does, why it’s so tricky, even if you’re right that something is the top priority of the president, that doesn’t mean they’re going to be able to enact it so cleanly.

And I think that brings us to a question. It’s hard to find a clear link between the political parties and the market outcomes, but are there specific policies that we can look at and say, these are policies that have had a good or bad impact on markets or economic growth. Are there examples of those policies in the current election that we can point to and say, there might be a predictable effect here?

And let’s be fair, let’s pick a policy proposal from each party.

Let’s be fair here. So let’s begin with Vice President Harris’s policy proposal to raise taxes on corporations. We often hear allegations, perhaps, that corporations don’t pay their fair share. And so there’s a desire by Vice President Harris to raise the amount of corporate taxes, income taxes paid by corporations.

If we just look at that very simplistically for a moment, Josh, I think it is objectively true that if corporations have to pay more of their profits in the form of taxes to the federal government, that’s less income, less net income left over for investors. That would be a bad thing. All things held equal, which we’ll come back to in a moment. That should, in theory, push down stock prices. I think it logically makes sense that if corporations are paying more in taxes, the value of those corporations would subsequently decline.

Now, that is all things held constant, which in economics that is never the case. The economy is infinitely complex, the market is infinitely complex. We have millions of global participants at any one time participating in the trading of stocks and bonds and every other security on the planet.

And so it’s very hard in hindsight to look back and draw a clear your connection between what happened in the market to a political policy. But again, I think it is intuitive that if corporations have to pay more in the form of taxes, that their stock prices would go down.

Now, let’s consider tariffs. The Trump administration levied a number of tariffs against US trading partners. Under President Trump’s first administration, tariffs have become a hallmark of his policy platform for this election. And if we think about what a tariff is.

A tariff is a tax. It is a tax levied against imported goods and services that ultimately consumers have to pay. That’s you. That’s me. If we go shopping at Walmart or on Amazon and we’re purchasing something that is imported from China, and there’s a 10% or 20% tariff levied on that product, at the end of the day, it’s the consumer that is ultimately going to pay that elevated price now by virtue of that tariff.

Tariffs you could argue that they are inflationary. I think there’s some legitimacy to that claim. But I also think that logically, if we put tariffs on a lot of goods and services that consumers regularly purchase, that’s going to hurt economic activity. Consumer spending logically should go down. If prices go up, consumer spending should go down.

So looking at the Harris policy proposal to raise corporate income taxes, yes, that logically would be negative for the equity market, the stock market. But similarly the imposition of tariffs arguably would also be bad for economic growth.

And once again, it really goes back to how much they actually implement the policies. I mean, I remember with the trade war during the first Trump administration, there were times when they were lowering tariffs on and there were times when they were making deals and taking tariffs off. It wasn’t obvious at any given point what that tariff level was going to be one year in the future.

And I think the tariffs also speak to something interesting, which is how much can we really compare the parties over time when we’re comparing over the course of 100 years, and we’re comparing Democratic policies over that whole period, or Republican policies over that whole period, how much have they actually stayed the same to the point we can really even say that there’s such a thing as a Democratic or a Republican policy that’s been in place for hundreds years when they’ve had the presidency?

Josh, I think you nailed it. I think that’s the elephant in the room right here we were a few moments ago talking about stock market returns under Republicans versus Democrats and GDP growth under Republicans versus Democrats. The reality is that today’s Republican Party and today’s Democratic parties, they’re very different than the party platforms of the past.

Let’s look at Bill Clinton. Bill Clinton signed the North American Free Trade Agreement, I believe, in 1993. The Democratic Party for generations was the party that advocated protectionist policies. They were the party of tariffs. They were the Pro union, pro manufacturing base party during the ’50s and ’60s and ’70s and ’80s And it was the Republican Party that historically, prior to then they were the advocates of free trade, right?

So here, we are fast forward to where we are today. And the Trump administration is advocating for tariffs, not something that you would have expected, Ronald Reagan, for example, to be a proponent of. And so I think it’s really fair to say that the parties today are very different than the parties in the past.

If we look at the Democratic party of the 1990s and 2000s, the Democratic Party today, I would argue, has made amazing inroads to Wall Street and big business. Whereas when I was growing up in the ’70s and ’80s it was the Republican Party that was alleged to be the party of big business. Yet today, it’s very common to find big Democratic donors coming from Wall Street and Silicon Valley and places like this. So I think your point is well taken, and that is trying to argue that a Republican today is the same as a Republican in 1980. That comparison just does not hold water.

And so if it’s this hard to make sense of how the political outcomes are going to affect financial markets, going to affect our portfolios, what are the takeaways for investors? What should people do around elections? As citizens this is a really important moment. But as investors, what do we do with that?

There’s a few takeaways, Josh, because of the ambiguity in the data with respect to drawing these very simple cause and effect relationships, I think it’s obvious that investors should remain well diversified. That’s number one.

Number two, the truth is markets have done well over time under both political parties. I just told you that the market under the Biden administration has averaged about 13% annually under the Obama administration, it was 16% Under Trump, it was 16% So the truth is that markets have done amazingly well, regardless of which party controls the White House or controls either chamber of Congress.

So number one, stay diversified. Number two, markets have done well over time. There’s no need to worry. There’s no need to try to time markets or try to play games with picking sectors that you think are going to do well under different administrations.

And I think the final takeaway here is to not mix politics with your portfolio. That is a deadly combination. You are investing your capital to support you and your family for generations to come. We have elections in this country every two years. We have presidential elections every four years.

So trying to use our long term capital to pick and choose winners, to try to profit from different winners of the election, I think Josh could be very detrimental to our long term financial health. So again, three takeaways. Markets have done well over time, regardless of who controls the White House or Congress. Number two, stay diversified. And number three, keep politics out of your portfolios.

Well, I think that’s a good place to leave this. Thank you so much for joining us for today’s episode of Market Perspectives. And special thanks to Don Calcagni for his insights. If you’re already a Mercer’s Advisors client, feel free to reach out to your advisor with any questions about your portfolio of this conversation sparked any questions. And if you’re not a client but would like to learn more, please visit our website merceradvisors.com. Until next time, this is Market Perspectives.

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