Knowledge. Shared Blog

September 2020

Why Your Financial Plan Should Be Apolitical

Financial markets will have ups and downs regardless of who wins the election this November. Rather than try to predict which candidate will be better for their portfolios, Retirement Director Ben Rizzuto encourages investors to focus on things they can control while sticking to a long-term financial plan.

Hence it is evident that the state is a creation of nature, and that man is by nature a political animal.” – Aristotle, The Politics, Vol. 1

As Democratic strategist James Carville famously reminded us in 1992, “It’s the economy, stupid.” His statement was intended to keep Bill Clinton’s campaign on message and highlight the candidate’s focus on pulling the country out of recession.

The health of the economy remains front and center in the current presidential debates. Over the next several weeks, each candidate will attempt to show voters why he is better suited for the office and more capable of growing the American economy. As part of that discourse, they will talk about jobs, wages, taxes and the stock market.

But does the president really impact the stock market? Many would say yes.

The case for this argument is built on the ideologies and practices unique to each party: Republicans are said to be more fiscally responsible, which should lead to less government spending and lower taxes. Combined with Republicans’ pro-business sentiment, this fiscal responsibility could theoretically lead to increased growth, lower debt-to-GDP (gross domestic product) ratios, and a stronger economy and stock market. Democrats, on the other hand, are said to favor social programs, government spending, and higher taxes on corporations and the wealthy – all of which, some would argue, could be less advantageous to markets and less supportive of economic growth.

Of course, these assumptions are entirely theoretical. How has the conventional wisdom played out over time in the real world?

Historical Stock Market Performance: Democrats vs. Republicans

The president who saw the largest increase in the S&P 500® Index (represented by price change) during his administration was a Democrat: Bill Clinton. During his years in office (1993-2001), the S&P 500 increased by a whopping 210%. He is followed by yet another Democrat, Barack Obama, who during his years in office (2009-2017) saw the index increase by 182%.

The next-highest increase occurred under a Republican president, but we must go all the way back to Dwight Eisenhower’s 1953-1961 administration, when investors saw the S&P climb 129%. This is followed by a 117% increase under the Reagan administration (1981-1989). In sum, from 1952 through June 2020, annualized real stock market returns under Democrats were 10.6% compared with 4.8% under Republicans.1 Going back even further, since 1929, the total return of the S&P 500 has averaged 57.4% under Democratic presidential administrations, versus just 16.6% under Republicans.2

The first two years of an administration paint a different picture, however. While this period has historically been sluggish during any presidency, Republican administrations have fared better. But the difference in performance varies significantly when we consider the makeup of Congress and what type of political gridlock scenarios a president must govern through. Furthermore, looking at a full four-year period paints an entirely different picture – one that tends to minimize the differences in stock performance between the two parties.

Why Politics and Financial Planning Don’t Mix

The takeaway from the scenarios outlined above is that there is no clear answer to the question of whether a Democratic or Republican president is better for the stock market. Over time, the differences simply are not significant enough to draw a definitive conclusion.

And that’s where our quote from Aristotle comes into play. While we cannot deny our true nature as “political animals,” we should not let that part of us sway how we think about our financial lives and how we invest for the long term.

The most obvious reason is that our lives in retirement are not broken up into four-year terms. Retirement can last 20, 30, maybe even 40 years – a timeframe that could span several presidencies. Therefore, it is unwise to let our political leanings and what we believe to be good or bad about candidates and the political parties they represent dictate how we plan. Because regardless of who occupies the White House, the markets and economy will inevitably experience ups and downs that we must do our best to plan for and navigate. So, rather than worry about what might happen over the next four years, it’s better to focus on the things we can control.

Republican or Democrat: Three Ways Politics Impact Your Financial Plan

Politics do play a part in three key areas related to your financial plan: Taxes, estate planning and government programs. Following are some considerations to be aware of as part of your long-term plan:

  • Taxes: Democrats and Republicans clearly have differing philosophes when it comes to taxes. As such, it’s important to build tax diversification into your financial plan. That means ensuring that you have buckets of tax-free, tax-deferred and non-qualified assets available. As tax regimes change, this diversification can provide you with the flexibility to draw income and pay for expenses in the most tax-efficient way possible.
  • Estate planning: The tax environment has a significant impact on how you plan for future distribution of wealth and should absolutely be factored into your estate plan. While the estate tax doesn’t kick in until $11.58 million (2020), this figure could fluctuate as administrations change. How estates will be taxed in the future will also affect how you and your family discuss the non-tax issues of estate planning. These discussions and decisions are critical to making sure family members understand what they may or may not be receiving (after-tax or otherwise), as well as ensuring the intentions of parents are understood and followed.
  • Government programs: Different administrations will focus on different areas when it comes to government spending, and those focus areas will affect how programs like Medicare, Medicaid and Social Security are run and sustained into the future. These programs and others play a huge role in how you plan for income and expenses in retirement, so it’s important to at least understand how they work so you can get the most out of them and instill a bit more certainty in your retirement plan.

We may be political animals, but we have no control over the political landscape. There’s no way of knowing yet which party will be in the White House during the next term – or several terms from now. Whether it’s a Democrat or Republican, the stock market will continue to have its ups and downs. Market-disrupting events (like global pandemics) will remain as unpredictable as ever. And the health of the economy will hinge on a lot more than the dominant political party.

Despite all this uncertainty, with careful planning and an understanding of how things like taxes and government programs factor into your financial decisions, you can be better prepared to navigate the ever-changing political landscape – regardless of who you’re voting for in November.

 

1“We Looked At How The Stock Market Performed Under Every U.S. President Since Truman – And The Results Will Surprise You.” Forbes, July 23, 2020.
2“Stock Market Performance in Presidential Election Years.” Charles Schwab, May 22, 2020.

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