Will Trump Impact Your Investments?
Political parties can impact markets but not as much as you might think. If you have a good plan, it’s usually best to stick with it, regardless of the political landscape. Over the past few months it has been rare to have a client meeting where Donald Trump has not come up in conversation. Many clients have been asking what impact Trump may have on their investments. In our view, likely not much. History suggests that whichever party holds the Oval Office typically has had little lasting impact on overall market performance. Among the most powerful drivers: the business cycle, interest rates, corporate earnings, and when it comes to your personal performance—your investment plan. Political events like the recent U.S. Election may spur short term volatility; however, this is something the active managers on your mutual funds will try to take advantage of. For long-term investors with a solid investment plan, short-term market swings should be expected and, as always, it's important to take a long-term perspective. History lessons A look back at how the U.S. stock market has behaved under different political regimes since 1960 shows that over the long-term there has been no significant difference, on average, between which party controls the White House (see graphic below). The Democratic and Republican average annual returns were both close to 12%. Even in times when one of the political parties swept the house and congress, the difference was less than 2% (with a slight edge to the Democrats) showing the limits of the party impact. As you can see, over long term periods the party composition of the U.S. government has not been a critical driver of market performance. Investment outcomes based on what party wins since 1960.
*Average annualized returns for the 3,000 largest U.S. stocks 1960–2015. Source: FMR Co. So why is there not a clear connection between party control and overall stock market performance? There are many other powerful forces at play impacting the stock market, including corporate earnings, employment, interest rates, innovation and other competitive forces. Also, stocks have had the tendency to adjust their price well in advance of possible policy changes. There is obviously a lot more at play than politics alone (see graph below). Good and Bad times for both Parties: Remaining disciplined during political shifts and financial and geopolitical shocks has proven a smart long-term strategy.
S&P 500 Index price returns, from January 1981 to October 2016. Source: YCharts. That doesn’t mean a President or Congress can’t change things through new regulations and policies. In particular, tighter regulation can weigh on the sectors it hits. For example, the potential for drug pricing regulation has recently compressed multiples in the health care sector. However, even these trends do not necessarily affect all health care companies the same way. We believe funds with a focus on bottom-up, fundamental company research can identify attractive investment opportunities across all sectors of the market regardless of which party is in power. History thus suggests, investors should not take a simplistic view of election results and think one party or another is going to be good or bad for stocks in general. Active managers are always working to take advantage of particular opportunities, or help to avoid specific risks that result from short-term volatility, and factors that could impact company earnings or investor sentiment. Circling back to Trump, we think everyone can agree that he is riddled with character flaws, one of which is the urge to say something controversial at the worst possible time. This may lead to short term swings in the market, but there are two things you may want to keep in mind when he does this. Unless there is action to back up some of his off the cuff remarks, there will be little long term impact on your investments. Also, any policy changes he wishes to implement still need to pass through the House of Representatives and the Senate. So even with Trump in charge there are still many controls in place. At this stage, he is their guy and all we can do is hope there is still one more big surprise coming…that he becomes a great president (deep breath). Thank you, Andrew & Peter