ILLUSTRATIONS BY MIKE MCQUADE / BUTTON PHOTOGRAPHS BY SHAYLA HUNTER
Stocks will plunge if Donald Trump is elected President. And the bond market could capsize if Trump goes ahead with plans to renegotiate the national debt. Yeah, but if Hillary Clinton wins the White House, she’ll cripple the economy by hiking taxes by $1 trillion. And oh, by the way, her foreign policy will end up destroying the world. As these are actual statements made by famous investors—like billionaire Mark Cuban and Swiss investment adviser Marc Faber—it’s understandable if you’re worried that the outcome of the election could upend your portfolio.
But while the inhabitant of 1600 Pennsylvania Avenue can alter the lives of billions of people, history says presidential politics have a surprisingly small impact on your portfolio. “There’s no empirical evidence to suggest that who the President is, whether Republican or Democrat, should cause you to want to deviate from your investment strategy,” says Gregg Fisher of the investment firm Gerstein Fisher. The fact is, stocks generally rise over time no matter who’s in charge (see the chart below). After the silly season is over on Nov. 8, about half the country will be elated, and nearly half will be scared. And both groups, research shows, are likely to tweak their investments accordingly. That’s when things really get risky.
The key to your success this year is understanding that your emotional reaction to the election—not who actually wins it—is what truly matters. How can you keep politically charged rhetoric from getting the better of you? Adopt these three planks in your investment platform to make your portfolio great again.
Keep your Partisan Emotions in Check
IN SEPTEMBER 2009, as the economy began to recover in the first year under Barack Obama, famed investor and libertarian Peter Thiel argued that “the recovery is not real.” Thiel, who supported John McCain’s 2008 campaign, told the Wall Street Journal that “deep structural problems haven’t been solved, and it’s unclear how we will create jobs and get the economy growing again.” That was six months into what has now been a seven-year bull market. Thiel’s hedge fund went on to lose 25% of its value that year, while the market gained more than 26%.
Political values have an impact on almost everyone’s investment behavior, in ways you may not even notice. One study found mutual and hedge fund managers who contribute to Democrats tend to own fewer sin stocks—think shares of tobacco or gun manufacturers—than do Republican-donating managers.
Another set of surveys showed that concern over the federal deficit varied depending on which party was in charge. Under Bill Clinton and Obama, fewer than half of Democrats thought reducing the deficit was a top priority, but that jumped to two-thirds under George W. Bush. For Republicans, the results were just the opposite, according to a Pew Research Center report.
These political biases can easily bleed into your investing behavior. “People’s positive sentiment when their party is in power leads them to think the world will deliver higher returns with lower risk,” says Santa Clara University professor Meir Statman, an expert in behavioral finance. “This can be misleading.”
Indeed, one study looked at the behavior of about 60,000 investors from 1991 to 2002 and found that people take greater market risks when their party controls Washington. The study, titled “Political Climate, Optimism, and Investment Decisions,” also discovered that investors affiliated with the party out of power tend to grow restless and trade securities more frequently. That impatience causes them to underperform compared with when their party is in charge. As you can see, investing, like anything else, isn’t an entirely rational enterprise. But what can you do about it?
VISUALIZE HISTORY, NOT YOUR WORST FEARS. “Every single person has a bias,” says Michael Brady of Generosity Wealth Management. The key is not letting your heart influence your investments. When you feel the urge to sell or buy based on your convictions about a candidate’s policies, Brady recommends reminding yourself how the S&P 500 index has finished up in more than two-thirds of all calendar years since 1926, a period that’s seen eight Republican and seven Democratic Presidents.
Visualization can be a powerful tool: One study found that weight lifters’ brain patterns are similarly activated when lifting hundreds of pounds or simply imagining the act. To that end, photocopy the chart below and paste it to the computer you use to make trades. If the election isn’t turning your way—or even if it is—look at how the market has risen in good administrations and bad.
BUILD IN A SAFETY VALVE. If you know you’ll be riled up in November, then blow off some steam—but regulate your behavior. Commit to capping your trading to no more than 5% of your portfolio this election year to limit any damage. “We cannot shut our emotions down,” says Statman. “But we can create some structure to prevent us from falling prey to those errors.”
STAY OUT OF THE ECHO CHAMBER. An all-too-common mental mistake in political seasons is “confirmation bias,” in which investors seek out only information that reinforces their worldview. On March 6, 2009, for instance, Stanford professor Michael Boskin argued that Obama’s policies—marked by higher spending, taxes, and regulations—were “killing the Dow.” If you were fearful, this insight from a respected economist might have reinforced your inclination to sell.
The problem is that all pundits, like investors, tend to see things through the lens of their own political views. Boskin was chairman of George H.W. Bush’s Council of Economic Advisers. And March 6, it turned out, was about the absolute low point of the bear market in 2009. If you let this warning send you to the sidelines, you would have missed out on more than 11,000 Dow points.
“I can say with 100% certainty that there is a really good chance we could see a huge, huge correction,”Mark Cuban told CNN’s Erin Burnett on Monday evening.
This is a bipartisan issue. Columbia economist Joseph Stiglitz, a key adviser to Bill Clinton, argued that George W. Bush’s 2003 tax cuts would be reckless and ineffectual, especially for new-economy companies. Those who listened and went to the sidelines missed a chance to double their money in tech stocks over the next four years. The key is to tune out economic punditry in election years and ignore any investment commentary that starts off with “If Trump wins …” or “If Clinton wins …”
Beware of Politicizing Your Portfolio
INVESTMENT NARRATIVES FORM quickly in election years. Right now, for instance, market opiners are advising you to buy shares of clean-energy companies, defense contractors, and multinationals in the event of a Clinton victory. A Trump presidency, on the other hand, should be a windfall for coal miners, small-company stocks (because their sales are mostly in the U.S.), and, of course, shares of construction companies that specialize in erecting walls. It all seems so simple.
But remember the assumption in 2008 was that Obama would put gunmakers out of business, turn health providers into wards of the state, and usher in a golden era for alternative energy. Tell that to Smith & Wesson, whose shares have trounced the market by 35 points a year for the past five years. Or to the health care sector, which has outpaced the broad market by more than two points a year in this administration. Or to clean-energy stocks, down 47% so far under Obama.
This happens in almost every presidential cycle. History said that Ronald Reagan would be the patron saint of small businesses for cutting red tape and slashing tax burdens. This was in stark contrast to Jimmy Carter, who oversaw rising inflation, fuel shortages, and general misery for the little guy. Yet the reality is that returns for small-company stocks grew more than twice as fast under Carter than Reagan.
“Given the alternatives, I would vote for Mr. Trump, because he may only destroy the U.S. economy, but Hillary Clinton will destroy the whole world.”Marc Faber
It just goes to show that while the business community may favor a particular outcome, companies find ways to adapt. “I run a business, and I don’t think that my business will function differently if Hillary Clinton or Donald Trump is in office,” says Fisher. “You tell me what the regulations or tax rates are, and I’ll figure out a way to deal with it.” This is how investors ought to deal with political uncertainty:
UNDERSTAND THE LIMITS OF A NARRATIVE. “The need to have a simple reason to explain a decision is similar to the need to have a story behind a decision,” Yale economist Robert Shiller wrote in his book Irrational Exuberance. Both “are simple rationales that can be conveyed verbally to others.”
The world, however, is often too complex for such simple story lines. Obama, for instance, is known for having pushed to reduce U.S. greenhouse-gas emissions by curbing the country’s reliance on fossil fuels. Yet major advancements in technology to extract petroleum from shale formations have led to a near doubling of U.S. crude oil production under his watch.
“The President isn’t a dictator,” says Brian Jacobsen, chief portfolio strategist with Wells Fargo Funds Management. “Just because he or she runs on a platform, it doesn’t mean that agenda will be put in place.” And even if the President gets what he or she wants, the real economy may not cooperate.
READ MY LIPS: NO NEW TILTS. In every presidential campaign year, investors are bombarded with suggestions about how to tweak their portfolios by adding a smidgen of exposure to sectors that will shine if Candidate X or Y wins. Google “stocks to buy if Trump wins” or “stocks to buy if Clinton wins” and you’ll get more than 20 million results each.
But as history shows, such bets can be risky. So for the rest of the year, avoid over-tinkering by limiting your adjustments to rebalancing between stocks and bonds. Better still, hold off rebalancing until next spring. That way you’ll avoid making emotional decisions and can take advantage of the seasonality of stocks. Historically, the S&P 500 has risen 7.6% in the first year of a presidential term, whether Republican or Democrat, as investors get past the uncertainty of the election. However, equities typically gain five times as much from November to April as from May to October. So wait until May when equities are likely to slow down.
IF OTHER INVESTORS ARE TILTING POLITICALLY, POUNCE. You’ve probably heard the saying “Buy the rumor and sell the news.” The Wall Street adage refers to the strategy of purchasing shares of a company before an anticipated development—when the stock is still cheap—and selling after the fact as the shares are getting expensive. Well, bargain hunters in election years might try an opposite tactic: Pass on the rumor and buy after the moves.
Just as there are stocks that are expected to do well in the event of a Trump win or a Clinton victory, there are investments that could be hurt by such an event. Trump, for instance, is on record saying he wants to reopen existing trade agreements to improve terms for American workers. Such talk—along with threats to impose tariffs on goods from China and Mexico—have spurred fear of a trade war. If it looks as if Trump is headed for victory, other investors are likely to tilt away from shares of big multinational corporations, viewing them as losers under the Donald. That could lead to bargains for patient investors.
Something similar occurred in 2004. In that campaign alternative-energy stocks were expected to be a big winner if John Kerry beat George W. Bush, the choice of Big Oil. After Kerry lost the election, clean-energy stocks slumped for six months—but doubled the market’s returns in the subsequent three years.
See the Right Patterns in the Market
“HUMAN BEINGS ARE pattern-seeking, storytelling animals,” says Wells Fargo’s Brian Jacobsen. “We’re very good at telling stories about patterns that don’t necessarily exist.”
Case in point: casual assessments of how Presidents affect the stock market. History shows that the average compound annual growth rate for equities since 1945 has been 9.7% under Democratic Presidents and 6.7% under Republicans. So that tells you that Democrats are a better choice for investors, right?
Well, it gets more complicated when you take Congress into account, say market observers who have crunched the figures in various combinations. It turns out that the absolute best market returns were generated under Republican Presidents working with a GOP-controlled Senate and a GOP-controlled House of Representatives. In that circumstance, the S&P 500 has gained 15.1% annually.
A separate analysis by Oppenheimer Funds found that when the Commander-in-Chief suffers a negative approval rating—from just 35% to 50%—the Dow Jones industrial average has returned four points more than when a majority of the country is satisfied.
So there you have it: Based on this data, you should be rooting for a unified Republican government helmed by an unpopular President. In other words: Bring back George W. Bush!
Huh? This assessment is clearly based on what statisticians call a small sample size. There have been only six years of unified Republican rule since 1945, most of them under Bush 43. Yet few would consider W’s presidency a success for Wall Street, considering the global financial crisis, the Great Recession, and the market crash at the end of his term. When you factor all that in, he ranks as one of only two Presidents since the Great Depression—one of three if you count Herbert Hoover—who oversaw an overall drop in equity prices.
So if you can’t rely on election-cycle analysis, what should investors be concentrating on instead?
IT’S THE ECONOMY, STUPID. The average economic expansion, based on 150 years of data, lasts about 39 months. The current upturn, which began in June 2009, is now in its 85th month, making it the fourth longest since the Civil War. This means that Trump or Clinton is likely to confront a recession early in his or her administration.
Rather than fixating on which sectors will thrive under which candidate, find areas that can withstand a downturn, like health care. (Don’t overthink what a Trump win might mean for Obamacare.) Like demand for toothpaste and other necessities, demand for health services isn’t dependent on a strong economy. And in these already sluggish times, health care revenues are growing more than eight times faster than the overall market, according to S&P Global Market Intelligence. For broad and cheap exposure, go with the Vanguard Health Care fund (VGHCX), which has beaten nearly 80% of its peers over the past 15 years.
GET DEFENSIVE EVEN IF YOUR CANDIDATE WINS. Bull markets also have a finite life—about 4½ years on average. This one is already more than seven years old. Time to favor large, dividend-paying stocks that tend to outperform in the final stage of a bull market over small stocks that excel early in a rally.
This focus on dividends is one reason shares of telecom companies have gained 24%, 43%, and 39% in the seventh, eighth, and ninth years of past bull markets. But what if you’re worried that not all dividend payers will keep making payments in a downturn? Go with SPDR S&P Dividend (SDY), which is in our MONEY 50 recommended list. The exchange-traded fund invests only in companies healthy enough to have boosted payouts for at least 20 consecutive years.
Dividends may not seem like a big deal, especially if the new President comes in proposing new tax rates and policies. But remember that whoever is elected will last only, at most, eight years. You, on the other hand, are investing for the rest of your life.