Clients and friends have asked me about the implications of the various presidential candidates on potential investment returns. Since the field of contenders contains some wildcards, it is logical for investors to wonder what implications this race may have on their taxes, the broader economy and their potential investment returns. There is a mountain of available commentary on the spectacle o the race, and I am not going to add to it from a political standpoint; rather, I will focus on practical, tactical concerns regarding your investments. More specifically, I’m going to address the questions of what should I do to “Trump-proof” or “Hillary-proof” my portfolio? I’ll first briefly cover this specific election (particularly in regards to their potential tax plans) and then address the issue more broadly.
First, a basic reminder about how markets operate… they react to new and unknown information[1]. All information that is currently knowable (including about presidential candidates) is already factored into stock prices in the US and abroad. Generally speaking, at this point, after countless debates, political ads, news coverage and commentary, polls and predictions, information about these candidates is known and hence already factored into current market prices.
So, for this particular election, it appears that Hilary Clinton is the Democratic nominee. She has always been a policy wonk, so she’ll probably release a detailed plan that raises taxes on the super-rich and throws in various targeted deductions and credits for the broadly defined middle class. If she wins the election, unless the Congressional mix changes dramatically, the House of Representatives will try to block her proposals.
On the Republican side, Donald Trump appears to be the candidate. He is not a traditional Republican and doesn’t tend to stick with conservatives themes regarding fiscal and economic policy. At this point, he tends to talk more about his preferences rather than on clear plans and details. Regarding taxes, he will likely propose the usual tax cuts with a few wildcard proposals with the hopes of encouraging stronger economic development. If Trump wins, and the composition of Congress remains largely intact, Democrats in the Senate will use every last shred of power to squash his proposals.
So while I don’t like to make predictions, it is likely that whoever wins, they will face considerable opposition to their proposals and radical change regarding tax policy is not likely. Obviously there is more to the economy than just tax policy, but similar trajectories and outcomes will likely happen in other areas too (fiscal policy, regulation, etc.). Regardless of the issue, the new President will propose many things and likely face considerable roadblocks in getting them passed. Around the margins, they will work to advance their causes. All of this is known and has been factored into the markets.
So if we look beyond this current election, does it make a difference to your portfolio whether a Democrat or Republican holds the highest office? Reviewing historical data for the US markets[2] from 1927-2015 and the corresponding presidencies, you find that the GOP was in office for 43 of those years and the markets during that time returned just under 5% per year. The Democrats were in office for 46 of those years and surprisingly, markets performed even better, returning about 14% annually.
Does this broader picture review imply that you should only invest when Democrats hold the presidential office? Absolutely not! This is not a statistically significant study and there are a lot of variables affecting markets during these time periods. Moreover, this is just the performance in the US markets. Since markets historically have been up every three out of four years, you are missing out by being out of the markets for any presidential term, regardless of who is in office. But most importantly, many factors beyond the party of the president go into the functioning of the economy and the performance of markets[3].
So what should investors take away from this review? As with many things in life, it is best to focus on what you can control. We need to remember that in our democratic republic as well a most investors time horizons, a four or eight-year presidency is short term. As a result, in preparation for Hillary or Donald, we should continue to follow the basic rules of investing: own equities appropriate for your time horizon, diversifying globally and rebalance over the long term.
In the short term, markets will continue to move based on new information, politics will continue to look like a circus, and we’ll continue to be human and make decisions based on how we feel. But in the long term, history has proved that the markets and hopefully our political system will stretch to accommodate most of what ends up happening.
[1] This is the basis of the Efficient Market Hypothesis for which Dr. Fama won a Nobel Prize in 2013. The Efficient Market Hypothesis more or less argues that all available information is already priced into the market and therefore, it is basically impossible to beat the market.
[2] US Markets as defined by the CRSP 1-10, which is the total stock market, comprised by the aggregate market capitalization of all companies listed on the NYSE, AMEX, and NASDAQ exchanges. CRSP data provided by the Center of Research in Securities Prices. Past performance is not an indication of future returns.
[3] The Economist recently did a story on America’s misery index – adding together the inflation and unemployment rates. This is a metric that has been used since the 1970s. Their article ranked presidents by this index and is an interesting read. http://www.economist.com/blogs/graphicdetail/2016/02/daily-chart-13