With the presidential election nearing, it is not unusual for investors to question how the outcome will impact their stocks. Should investors position for a Republican administration or a Democratic administration? We say neither as investors should look beyond politics and not make politically driven portfolio changes for three reasons.
First, politics is only a small part of our investment framework, ranking 8th out of the 10 factors we use.
The most influential factors include economic growth, corporate earnings, monetary policy,
and valuations. The reason? These factors determine the fundamentally supported direction of the market, where political headlines tend to induce temporary volatility.
Second, prevailing equity market political wisdom has often been incorrect. Look at the previous administration. Market pundits favored the energy sector. But elevated supply and a declining oil demand made energy the worst performing sector during that presidency. In fact, it was the only sector that was negative.
At the beginning of the current administration, the Green New Deal and related policies were supposed to hamper energy companies. But thus far, energy is surprisingly the best performing sector. The point? Macro forces are the main drivers of the equity market, not politics.
Third, partisan investing has been ineffective throughout history. A portfolio invested in the S&P 500 only when a Republican was president or only when a Democrat was president would have dramatically underperformed staying fully invested regardless of who was in power.
And after 30 years of advising clients, that’s why we continue to preach that it’s not about timing the market but time in the market that counts. Investors should focus on the underlying economic fundamentals and market trends rather than solely on political rhetoric. Diversification and a long-term perspective are key strategies for navigating market volatility regardless of political shifts.
The Bottom Line
As elections approach and political debates intensify, remember that market success transcends party lines. Making informed investment decisions based on sound financial principles is far more valuable than investing according to political allegiance.
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