The fervor, passion and hyperbole of our presidential election cycle has begun to rival and exceed those of major sporting events such as the Super Bowl and the World Series, and in many ways has become our new national pastime.
As we move through the playoffs (the primaries) to the championship round (the general election), in which each party will attempt to paint the election of the other’s candidate in apocalyptic terms, it might help to remember that most of our national elections, to quote William Shakespeare, are “full of sound and fury, signifying nothing.”
- Franklin D. Roosevelt’s opposition attempted to paint him as the President who governed “with the same philosophy which has poisoned all of Europe, the fumes of the witch’s cauldron which boiled in Russia.”
- And who can forget the famous “Daisy” television ad from the 1964 presidential campaign leveled at Republican candidate Barry Goldwater by incumbent President Lyndon B. Johnson? The ad begins with a young girl counting the petals she’s pulling off a daisy and quickly switches to an ominous-sounding countdown to zero, when a huge mushroom cloud from an atomic weapon detonation fills the screen. LBJ’s campaign went on to turn Goldwater’s slogan, “In your heart you know he’s right,” against him with, “In your guts you know he’s nuts.”
- Ronald Reagan was “the B-level movie actor, dangerous cowboy and intellectual lightweight” whom even a United Artists movie studio executive turned down for a role to play the president because Reagan would have been unconvincing.
- And Bill Clinton was the Manchurian candidate who had been brainwashed by Russians when, as a Rhodes Scholar studying at Oxford, he visited Moscow.
And yet somehow the Union has endured.
To paraphrase noted Princeton economist Alan Binder, economic growth and financial market returns during a President’s term are explained by good luck with perhaps a touch of good policy. And even then, good policies might take years to have an impact, benefiting future administrations.
Do Elections Matter to the Markets?
As we huddle around the TV tonight awaiting the Super Tuesday primary results, remind your clients that the implications of elections for the global economy and the financial markets are less significant than many believe. Sure, the next occupant of 1600 Pennsylvania Avenue may be promising certain policies that are more beneficial than others (or not). But it is the 2 billion other households around the world that will ultimately determine the direction and strength of the global economy. And that is what matters most for financial markets.
Consider January 20, 2009, when Barack Obama was sworn in as our new president. We heard many investors say they were going to stay on the sidelines, given Obama’s policy positions.
At the time:
- The S&P 500 was trading at a historically cheap 12x trailing 12-month earnings,1 a significant discount compared with the long-term average of 16x;2
- Monetary policy was very accommodative, with the Fed funds rate at 0%; and
- The leading U.S. economic indicators, following the worst recession in decades, appeared to be stabilizing.
So how did that work out? Stocks went on to return 200% in the subsequent six years.3
Exploding the Myths
Are national elections important? Yes. Do national policies matter over time? Yes. Should these four-year election cycles govern your long-term investment decisions? No (Exhibit 1).
As the chart shows:
- A $10,000 investment held in the Dow Jones Industrial Average (DJIA) from 1945 to 2015 would now be worth $1.3 million.
- On the other hand, if an investor owned stocks only when his or her preferred political party held the White House and sold when the other party was in power, that same $10,000 would be worth about $1 million less.
Another commonly held myth is that the country in general and financial markets in particular would be far better off if the political parties were more cooperative and willing to compromise to get more accomplished. The reality is that the markets do better during times of government gridlock in Washington, D.C. From 1901 to 2014, the DJIA posted annualized returns of 7.0% during periods of divided government, but only 4.6% annualized returns when we had a unified government (Exhibit 1).
Our founding fathers designed the government in a manner that ensured gridlock, with three co-equal branches of government and a strong federalist system. You see, their greatest fear was tyranny, and nothing inhibits tyranny more than gridlock! Our markets seem to agree with the words of Henry David Thoreau, “that government is best which governs least.”
What Investors Should Do
As the election cycle plays out between now and November, investors should sit back, grab a bag of popcorn and enjoy the spectacle to come! However, they should also stay “buckled in” to their long-term investment strategy regardless of who sits in the White House.
We may not know who the next president will be, but we do know that 150 million American households and 2 billion households around the world will have the greatest influence on the global economy and the financial markets.
Compelling Wealth Management Conversations is a program designed to help provide philosophical and historical context and perspective to keep investors “buckled in” and stay the course during uncertain times (and when have times not been uncertain), while providing a framework to help identify the best opportunities going forward.
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1 Source: Bloomberg, 1/20/09.↩
2 Source: Bloomberg, 1950-2015.↩
3 Source: Bloomberg, 1/20/09-5/21/15.↩
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