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Presidential Impact on Financial Markets?

While many may feel that the current President is responsible for driving corporate profits and the economy, this is simply not the case. The economy is much more complex and made up of the commonwealth of our entire country and to some extent, the world. Presidents and their administrations have little impact on the financial markets.

While there have been concerns about the Trump Administration, the position has little relevance to the financial market’s performance in the long run. Warren Buffett, widely known as a liberal democrat and one of the most influential and successful investors of all time through his disciplined approach to investing was quoted on 1/31/17 saying, “We’ve, net, bought $12 billion of common stocks since the election.”

A colleague shared with me a great analogy about market reactions to different administrations that might help put this into context…

Administrations and politicians affect the markets in a similar way that the driver of a theme park car affects the direction of that car. Regardless of which way the steering wheel is turned, the driver only has limited control over its ultimate direction. This is because the fundamentals of the economy, in this case the rail, have the most significant impact over its direction.

Dr. Jonathan Lemco 1 studied stock market returns from 1853-2015. He compared the average return of equity markets and the party controlling the White House. He found that over this 162-year period, the returns were … are you sitting down? ... Identical for each party! It is the ingenuity and industry of the people that drive markets, not politics. While not part of Dr. Lemco’s study, the following chart appears to support his conclusions.

The public’s narrative or perception is not necessarily a reflection of reality. Here are a few examples of how people from different parties responded when asked about certain aspects of how the economy performed under President Obama:

  • The poll asked whether you thought the stock market was up or down under President Barack Obama… You can see the two parties answered considerably differently. Interestingly, even members of the same party had their own story for what was transpiring in the markets.

We know that the market has increased significantly

  • This second poll asked if the unemployment rate increased or decreased under Obama

Wrong again…, unemployment has gone down under President Obama, almost halved from 8.35% to 4.4%.

It might just be that, as human beings, sometimes we write our own narrative to support our positions. And while the positions may be real, often times, the narrative is not.

This does not mean that there is not going to be a correction or pullback. In fact, I can assure you that there will indeed be a correction. Why? Because it is natural for it to happen and it does ALL the time. Just take a look at the drawdowns by President in the following chart:

In conclusion, investment success has depended more on the strength and resilience of the American economy than on which candidate or party holds office. Successful long term investors stay the course and rely on time rather than timing. We build client portfolios in anticipation of volatility, not in response to it. A well-diversified portfolio should be consistent with your long-term objectives. There will be many periods when the portfolio experiences losses, however, research has shown that staying 100% invested has consistently proven to be the superior strategy for disciplined investors.