“Ilsa, I'm no good at being noble, but it doesn't take much to see that the problems of three little people don't amount to a hill of beans in this crazy world. Someday you'll understand that.” Humphrey Bogart as Rick in Casablanca.
Not long ago I overheard someone in a crowd say, “Politics is everything.” Boy, not something I can ever imagine being true. I have a growing interest in astrophotography. I like to take pictures of the Milky Way. The Milky Way is only one of an estimated 2 trillion galaxies. It’s estimated that there are at least 100 billion stars in the Milky Way. Some estimates are as high as 400 billion. Our sun is just one out of at least 100 billion. That’s extremely tiny! When I can get a very clear photograph, there are so many stars that it’s almost like a pile of trash.
Our beautiful planet is less than 1 millionth the size of our otherwise tiny sun! And I am only one of 8 billion people living on the edge of this tiny spec.
But even if we restrict the discussion to human affairs, the statement, “Politics is everything”, completely ignores art, religion, families, sports, and on and on and on.
In the world of investments, politics is important but it’s not the most important thing. My own ranking is somewhere around 3 or 4 on the list of importance.
- Corporate Profits
- Interest Rates
- The Economy
- Politics
Numerous polls show that when Democrats hold the White House that Republicans on average think the economy is terrible. The reverse is also true. Democrats think the economy is terrible when Republicans hold the White House. But these are clearly opinions based on emotions rather than grounded in reality.
In recent years, many Republicans have taken to complaining about the Biden Economy. They see that as a negative and complain about how bad things are, even though the last recession was during President’s Trump’s term in office, even though unemployment has stayed below 4% longer than at any time in the last 50 years, even though inflation in the US is lower than the rest of the G-7 nations.
Investing can be very emotional, but mixing political opinions about the economy into any investment strategy can be a dangerous brew.
This is the reason for the first part of my headline. The Election Matters Less…Than You Think. It might matter for many aspects of life, but so long as corporate profits continue to grow and interest rates stay relatively moderate, there’s not much impact from the election.
But it does matter. And it may matter in ways you haven’t considered.
First, and I’ve written this here many times before, it’s hard to ignore the track record of Republican Presidents. In the last 124 years there has not been a Republican president without a recession. Maybe the reasons for this have nothing to do with politics, but anytime you ignore the lessons of history, you do so at your own peril.
Democratic presidents are not immune to recessions. They just haven’t happened nearly as often on their watch.
Looking back to that list of order of importance,
- Corporate Profits
- Interest Rates
- The Economy
- Politics
The reality has been, politics only mattered in terms of the impact they have on the first three.
According to a variety of studies, the stock market has done better over the decades under Democratic presidents than under Republicans. That makes sense when history has shown that when a Republican gets elected there’s a recession. But here’s what’s really interesting.
Looking at that record, you might be inclined to remove your money from the stock market whenever a Republican gets elected president. History also shows that doing so in the past would have been a big mistake despite the Republican’s dismal economic record. How can that be?
It has to do with compounding. Here’s a very short primer on compounding:
If you invest $100 at 5% annual simple interest, after 5 years you would have $125. Easy math.
But if you invest $100 at 5% compound annual interest, after 5 years you have $127.62. That might seem like a small difference but when you work it out over long periods of time the difference becomes quite large. The effect is that anytime you sit out of the market, you risk losing the effect of compounding your returns.
And I can’t emphasize enough, politics is just not important enough to base investment decisions on. Maybe the next Republican president will be the first one in a very long time to not have a recession during his or her time in office. Maybe a huge bull market will ensue. The past may be prelude to the present, but it does not dictate the present.
Of the three strategies, 1) invest only during Democratic administrations, 2) invest only in Republican administrations, and 3) just stay invested – just staying invested has beat the other two and it’s not remotely close.
So, politics may be everything in some small circles, but those are not investment circles. Don’t let your emotions about politics dictate your investment strategy.
Hal Masover is a Chartered Retirement Planning CounselorSM. His firm, Investment Insights, LLC, is located at 508 N 2nd Street, Suite 203, Fairfield, IA 52556. Securities offered through, Cambridge Investment Research, Inc, a Broker/Dealer, Member FINRA/SIPC. Investment Advisor Representative, Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Investment Insights, LLC and Cambridge are not affiliated.
Comments and questions can be sent to hal@getyourinsight.com. These are the opinions of Hal Masover and not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as individualized investment advice. Investing involves risk. Depending on the types of investments, there may be varying degrees of risk. Investors should be prepared to bear loss, including total loss of principal. Past performance is no guarantee of future results.