Why You Shouldn’t Align Your Investments with Your Politics
While the political conversations will undoubtedly get heated as U.S. midterm elections draw near, it’s important for investors to remember that no matter which way the political pendulum swings, your investment strategy should not be swayed by your political leanings.
Stock market performance cannot be tied to the political party in power
According to research published by the Pew Research Center, there isn’t a causal relationship between the political party in office and the stock market when considering its performance over past election cycles.
Currently, consumer confidence is at a low point for both Republicans and Democrats. Typically, no matter which political party is in office, you will notice that the party in power has higher confidence in their administration, while the opposition party has lower confidence. For example, with a Democratic administration in the White House currently, the Republicans (or opposing party) holds a lower consumer confidence. Conversely, when Trump, a Republican, was in the White House, Democrats held a lower consumer confidence than Republicans. You will see the same cycle play out if you look back over the Obama and Bush administrations.
Consumer confidence might be a better indicator of stock market performance
Party preference, according to the data, doesn’t indicate the strength of the stock market, but consumer confidence might. From January 2001-2009 (Bush Era), Republican consumer confidence was very high, yet the stock market annual average return was -4.5%. During the Obama administration From January 2009-2017, consumer confidence started off fairly low yet the stock market annual average return increased by 16.3%. During the Trump administration, the annual average return was on par at 16%. The current Biden administration has an average annual return of 3.4%, which makes sense given the rising rate of inflation and cooling economic activity.
Look toward long-term goals and consumer confidence, not political party
When considering the election cycles of the past 30 years, the stock market has averaged an annual return of 10%, despite various administration and party changes. We advise to stick to your long-term financial goals regardless of the political party in office as that will likely yield a better outcome than focusing on political preference. If you have concerns about how an administration change may affect your portfolio, please contact us so that we can discuss and review with you.
The Team at Chatterton & Associates
Although the information has been gathered from sources believed to be reliable, it cannot be guaranteed. Federal tax laws are complex and subject to change. This information is not intended to be a substitute for specific individualized tax or legal advice. Neither Royal Alliance Associates, Inc nor its representatives provide tax or legal advice. As with all matters of a tax or legal nature, you should consult with your tax or legal counsel for advice.