Elections tomorrow will determine the composition of the US House of Representatives, a third of the Senate, and 36 governorships. Politically, this feels like a divisive time, and accusations and dire warnings from both sides of the aisle are getting increasingly hyperbolic. How can we confidently invest or stay invested in markets at a time like this?
There was never a time where politics didn’t feel at least a little divisive in America. Recent events have us on high alert, but there are a lot of stories in the history books equally as shocking. In 1856 a Senator was beaten until unconscious on the floor of the Senate with a cane. A few years later, there was an all out brawl in the House including more than 30 members. Even as recently as 1988 a Senator had to be carried on to the floor feet first by the Sergeant-at-Arms to comply with quorum rules. The rise of aggressive algorithms on social media probably does contribute to political divisiveness today, and we don’t mean to minimize the recent events and violence in our political process. However, there has never been a period of time where politics have felt completely constructive and settled.
There has never been a period of forward-looking geopolitical security, either. Throughout the cold war and even today we have the omnipresent threat of nuclear conflict. Events like the Bay of Pigs invasion are largely forgotten today because they resolved safely, but there was no guarantee at the time that things would work out at all. All recorded history has been defined by the rise and fall of great powers, and these tectonic shifts in influence and control continue as countries like Russia try to stay relevant and countries like China aspire to become more dominant throughout the world.
We’re not going to solve the world’s problems today, but we can reassure you that despite all the uncertainty in the past, the markets have persevered- through world wars, inflation, recessions, and yes, even elections. Every time concerning news comes out, people wonder if “this time is different.” Each time is different in its own way, but thusfar the world, the economy, and the financial markets have always persevered in the long run.
Regarding tomorrow’s election, we can further reassure you that there is no evidence suggesting the political party in power reliably has any influence over the future trajectory of the markets. Here is a look at a US stock index highlighting control of Congress over the years:
The conventional wisdom is that populist candidates are negative for the markets and more conservative candidates are market positive. We think it’s more likely that different ideologies benefit different types of companies (for example, a Democratic sweep might be positive for green energy companies while Republicans might be good for coal). Also, there are elaborate checks and balances through the legislative process and via the judiciary, so even with a large majority, one party can’t have overly dominant influence.
Fortunately, we don’t have to spend any time worrying about which stock or sector might outperform based on a particular election outcome. Our style of investing has exposure to virtually every sector and countless companies throughout the world. The difference between our investments and a global index fund is that our fund providers overweight and underweight holdings based on expected returns rather than solely looking at market capitalization weights, which means our portfolio can thrive in a wide variety of political outcomes.
Though we’re not in a presidential election year, you might wonder if the White House has more control over market returns than Congress. You can see from this chart that there isn’t a lot of predictive value based on the presidency either:
We don’t want to minimize the importance of this election or the gravity of current events. However, we do want to remind you that markets will probably be just fine- in the long run. The only reason the future seems scarier than the past is because we already know how the past turned out. As long as we continue to experience productivity improvements, meaningful labor force participation, and per-capital real GDP growth, we believe the markets will continue to provide attractive returns after inflation as months turn into years and years turn into decades.