Every two years, the entire U.S. House of Representatives and one-third of the Senate are up for reelection. It’s a chance for citizens to reevaluate where things stand and decide if they want to make adjustments.
This past November’s election was particularly energized. In fact, CNN, MarketWatch and others, reported that 49.3% of the U.S. voting-eligible population turned out to vote. It was the highest turnout since 1914, with more than 116 million people casting ballots – incredible when compared to previous mid-term turnouts.
Many folks believe Twitter – and President Trump’s use of it – was a significant factor in why so many people voted. (Hence, my “Twitter speak” in the headline.)
Our Financial Viewpoint
As a wealth manager, I walk the line right down the middle. Our clients have varied political beliefs, so I try to be impartial on my “analysis” of our President and politics in general. The fact is, however, most people either love him or hate him. He’s polarizing (good or bad, depending on your opinion of him).
At Redwood, we’re mainly concerned with the impact President Trump’s policies and tweets can have on the financial markets.
Think of the financial markets as a powerful information-processing machine, accessing a wide range of data sources. While election surprises can (and do) happen, they don’t always lead to clear-cut outcomes for investors.
Impact of Historical Elections
Remember the day after Trump was elected President? The markets were extremely volatile and turned down quite a bit; hardly any polls had showed him beating opponent Hillary Clinton. His win surprised nearly everyone, and the markets reacted accordingly. The next day, however, even though the futures dropped significantly overnight, the S&P 500 finished up 1.1%.
As days passed, the markets settled and eventually regained their upward march (as they’d been doing since March 2009, the end of the Great Recession).
Now, halfway through the Trump Presidency, this latest mid-term election was a chance for many voters to show either their gratitude or dismay with the President and Congress.
Dimensional Fund Advisors (DFA), a leading source of investments in our client portfolio, recently provided the following analysis, based on historical election cycles: “…both parties have periods of significant growth and significant declines during their time of majority rule. However, there does not appear to be a pattern of stronger returns when any specific party is in control of Congress, or when there is mixed control for that matter.”
I have always heard that a split Congress is “better” for the markets because it’s harder for anything to get done; however, DFA’s analysis doesn’t indicate that over long periods of time.
As we enter 2019, the markets are volatile once again for many reasons we’ve already shared. In addition, Democrats now control the House of Representatives, and Republicans have a few more seats in the Senate. Most people theorize that these parties will agree on little policy-wise; therefore, the next two years will be filled with investigations, accusations, Twitter wars, and such.
As long-term investors, all of this must be ignored because, at the end of the day, markets go up based on companies and their earnings performance. Trump tweeting about trade wars and tariffs can do short-term damage, but if companies make money long-term, their stock performance should be fine.
DFA agrees: “Equity markets can help investors grow their assets, and we believe investing is a long-term endeavor. Trying to make investment decisions based on the outcome of elections is unlikely to result in reliable excess returns for investors. At best, any positive outcome based on such a strategy will likely be the result of random luck.”
I always tell my clients that, in each calendar year, U.S. markets typically go up 75% of the time and are down the other 25%. Volatility is normal and expected; not something to fear.
In other words, avoid the daily political rants and focus on the end goal. As long as companies worldwide make money, markets will go up.
Yes, politicians and policy can cause short-term swings; however, companies are used to this. Leaders of publicly traded corporations manage them with long-term goals – and shareholder returns – in mind. They have to; it’s their mandate.
So, focus on controlling what you can (which is plenty):
- your allocations
- your diversification using mutual funds and ETFs
- keeping your transactions costs and expenses low
- your taxes
These are the long-term drivers of portfolio returns. And we, at Redwood, can help you with all of this. It’s our mandate as fiduciaries.
A Sense of Humor Helps Too
To close, I’ll leave you with a theory from Rocky Pentello, one of my favorite teachers:
If you want to run for President and win, you just need to get every 18- to 20-year-old adult in the U.S. to vote for you. How can you accomplish that? By telling them you’ll lower the national drinking age to 18, of course. They will all vote for you and you won’t have to raise a dime because all the beer, wine and spirits makers, will fund your campaign!
Considering how Trump got elected leveraging social media and so forth, it’s not such a crazy idea.