We are readying ourselves for the US election in November and, from afar, the view doesn’t look flattering. This time around, it is looking like Kamala Harris versus Donald Trump, who is likely to spend significant time in the court rooms as well as on the campaign trail. It is surely an indictment of the US political system that this is the process for leadership of the most influential nation in the free world.
Does it matter who wins?
In some ways, probably not. Both the Democrats and Republicans will aim to be expansionary and will keep issuing bonds and printing money. While the Democrats might spend more, the Republicans will aim to reduce taxes more.
In some ways, almost certainly. In matters of foreign policy, we can expect a Republican presidency to renew stronger rhetoric around Europe’s contributions to NATO, possibly not supporting efforts to arm Ukraine, and likely promoting greater trade protectionism, particularly in respect to China. Conversely, President Biden has indicated he will propose extending tax breaks for those on low incomes while raising corporate tax rates, and potentially further promoting renewable energy development. Clearly the outcome in November will have a significant impact on some sensitive corners of the economy.
How investment markets might perform is much less predictable, although history says that patient investors will be rewarded regardless of which political party controls the White House.
One of the reasons why is because the president has no direct control over the share market. While the president influences fiscal policy to varying degrees, it is Congress that ultimately creates the federal budget, and government spending is only one of many variables that affect the share market. Also, when considering events like the dot-com bubble, the Great Recession, and the COVID-19 pandemic – no president caused those events, but all three events caused share market crashes.
Since the inception of the S&P 500 share market index in 1957, the respective market performance under different presidencies is highlighted below.
S&P 500 compound annual growth rate:
Given the ability for statistics to be easily manipulated, Republicans (higher median return) and Democrats (higher average return) could both try to claim the share market has performed better when they controlled the presidency.
However, investors should ignore such comments. Share prices, determined by business fundamentals like revenue and earnings growth, are merely influenced (not controlled) by a president’s fiscal policies.
While the winner in November may not have much of an impact on eventual market returns, this will nevertheless be a point of considerable global attention over the next 4-5 months.
Tune out the noise
There is a near constant swirl of speculative opinion both in the general news media and in the financial press about a range of factors or events for which the outcome is, and always will be, uncertain.
Not a day goes by without a big, scary headline professing at least some level of consternation about one or more of the following:
- the US election
- the timing and size of future interest rate changes
- the long-term impact of AI
- the consequences of a changing global political landscape
- whether inflation is really back under control
- whether technology companies are forming the next market ‘bubble’
- when the conflict in Ukraine or the Middle East might end
- the ongoing impacts of climate change
Unfortunately, reading (or watching) the guesses of different pundits about an unknown future provides no useful benefit to long term investors.
Markets, in aggregate, are aware of the prevailing uncertainties and, to the greatest extent possible, that uncertainty is already factored into asset prices today. Yes, as information changes, prices will move to reflect that new information.
The best response a long-term investor can have to uncertain events is to tune out the persistent noise about everything that is unknown or could go wrong, and focus instead on the strategic plan, and if there are still doubts, talk to your adviser.
