Given that November’s presidential election is rapidly approaching, we think it’s worthwhile to share our high-level views on the political cycle and our opinion of how big an influence politics should have on your investment portfolio (spoiler alert: less than you may think).
Due mostly to the proliferation of social media and today’s high degree of political polarization, our nation is fixated on this election cycle. The University of Michigan conducts a monthly Consumer Sentiment survey that attempts to gauge how optimistic the U.S. consumer is. As
part of the survey, respondents are asked to cite the reasons for their confidence ranking. Appropriately, “labor markets” is typically the most cited factor that influences respondents’ views of overall business
conditions. However, over the last year “government policy and elections” have surged into first place. It is now the most commonly cited factor. Looking back at prior election cycles, that factor was cited 5% of the time in 2008, 15% of the time in 2012, 16% in 2016, and in December 2019 it was a staggering 35%.
The University of Michigan data suggest that individuals are increasingly allowing their views on the economy to be influenced by what is happening in Washington DC. The chart from J.P. Morgan shows the percentage of people by political affiliation who rate the national economy as either excellent or good. Whereas the grey line is the national average – which ebbs and flows based on people’s perception of the economy – the red (Republican) and blue (Democrat) lines have much bigger exaggerated swings.
It’s fascinating to analyze the two most recent inflection points: (1) late-2008 when President Obama was first elected. Republicans became pessimistic relative to the total population, while Democrats became optimistic, which continued through Obama’s second term; (2) late-2016 when President Trump was elected. As you may have guessed, the exact opposite happened: Republicans became very optimistic while Democrats became relatively pessimistic. Currently, 79% of Republicans believe economic conditions are good or excellent, compared to just 33% for Democrats.
People’s perception of the economy is firmly tied to their political
affiliation and which party resides in the White House. This is an important concept since Behavioral Finance studies confirm that individuals commonly make investment decisions based on their perception of the economy. When an individual’s own political party is in power, they become more optimistic and perhaps perceive the stock market to be undervalued or less risky. Consequently, in that scenario, they might allocate their portfolio more aggressively than they would under a different political regime. This implies that on
average, Democrats have at least partially missed out on the recent
historic equity bull market, just as Republicans did previously.
Though it’s extremely early to make political predictions given how much can happen between now and November, it seems likely that the Senate will retain its Republican majority and the House will retain its Democratic majority. That would result in the status quo of a divided congress regardless of who wins the Presidential election. That describes the famous “gridlock is good” notion that ironically favors a divided government. The political divide typically means Washington isn’t able to accomplish as much as it otherwise would, which implies that it can’t as effectively destabilize the economy and in turn the
We at Foresight do everything we can to eliminate our inherent emotional biases from investing. Let’s not allow our personal political views to permeate our investment decision making so we don’t run the risk of disrupting our long-term financial plans.
Please let us know if we can help.
David Wrigley, CFA, CAIA • Foresight Wealth Management
Chief Investment Officer