POLITICS AND INVESTING
With all of the ups and downs in the stock market lately, and the multitude of different news headlines you see trying to explain it away – tariffs, potential interest rate cuts, rising or falling inflation, etc. You would be forgiven for worrying how the decisions or tweets made by those in the government will affect the stock market and your investments.
Maybe you think that having Republicans in charge leads to stability so that businesses can plan and make investments for the future, and that’s better for the stock market than when Democrats are in power. While your neighbor is sure that the complete opposite is true because of the economic stimulus that flows from all of the liberal spending projects. I have heard both types of comments over the years, and I’m betting you have heard them or know someone who has blind faith in one party or the other as well.
In 2010 I had a co-worker who was sure that the decisions congress and the federal reserve were making after the financial crisis were going to lead to runaway inflation, a recession, and another stock market crash, and was invested based on these outcomes. Unluckily for them and their portfolio, but luckily for the rest of us none of those situations has come to pass and the S&P 500 has almost tripled from then till now.
I’ve also heard people during the market drawdown at the end of 2018 say that they sold out of the stock market and wouldn’t invest again until “that bozo” was out of the white house. Right now, it is too soon to tell but the stock market did recover at the end of 2018 and has posted great performance through the first 2.5 years of this presidential term.
While it may feel like the government has a big effect on the economy and the performance of the stock market, I’m here today to tell you that it’s hard to see much of a difference based on who is in charge. And there are many other things you should be focusing on instead.
Democrats – Running up a deficit and that’s bad for the country and the markets… right?
People tend to believe that since Democrats want to increase spending and expand social programs like Medicare for all that the US spends more money when they are in charge. Depending on who you talk to, experts will say that the spending is good because it can help stimulate the economy, while others will say that the increased spending is bad because it generates more debt we will have to pay back later.
But either way, since the 1980s when Ronald Reagan was president the yearly budget deficit has tended to increase under Republican presidents and decrease under Democratic Presidents. So, maybe it’s Republicans who are spending and propping up the economy/saddling us with debt? Not exactly what you’d expect based on the stereotypes huh?
Republicans – The party of business… or not?
Experts also argue that the economy and the stock market both do better with a Republican president. After all, the GOP is considered the party of big business, which definitely leads to certainty and stability and a stronger economic outlook for the future. Except that’s not the case either.
Looking at the economic data starting after WWII, America’s GDP has grown 4.4% per year when Democratic presidents were in office versus 2.5% per year for Republicans. While the stock market has performed similarly returning 9.7% annually for D’s versus 6.7% annually for R’s during roughly the same time period.
And if certainty and stability from a business point of view is what you expect from a Republican president, you’d have a hard time making a successful argument that there is anything remotely stable about the decision making going on in the current White House. But, even with that all of that instability and the corresponding inability for America’s CEOs to make accurate plans for the future, the S&P 500 is still up over 30% from Jan 2017 to September 2019.
What you should actually focus on, instead of which political party is in charge.
Rather than pulling your money out of the stock market based on what happens next November, or any other gut related feeling you might have, focus on these three things that you can control.
1. Maximize your cash flow (Income – Expenses = Savings). Spending less than you earn is step number one towards successfully saving for the future. Maybe you can predict the stock market’s moves based on the daily political moves, but if you don’t have any savings to put to work as your investments then you still won’t get very far.
2. Build a plan. What are you saving and investing for? How much do you want to have in savings for emergencies, how much do you need each month to pay for your mortgage and student loans, how much do you need for retirement? Think about these questions and put a plan in place. It is much easier to achieve a goal when you have a realistic expectation of the money/time/effort it will take to reach it.
3. Understand your appetite for risk. Investing in the stock market has been the best strategy to achieve those long-term goals, but the stock market has good and bad days and everyone’s temperament is different. Having an idea of how you will react to stocks losing 20, 30 or 40% before recovering will help you build a plan that you can stick with for the long haul and see to completion.
By focusing on these aspects of your financial life, instead of the day to day movements of the stock market or the election by election movements of the government, you put your focus on things that you can control, rather than worrying about things in life that no one can predict.
If you’d like some assistance building a financial plan or understanding your risk tolerance and the decisions you should make to achieve your financial goals contact a financial planner today. At Steady Climb Financial Planning we have openings to bring on new clients in the fall. Schedule your free initial consultation today!