A 33 year old real estate agent and investor with over $120M in residential real estate sales. This is my way of sharing actionable ideas that will make you a smarter and wealthier investor.
How this Election Outcome Can Affect You
Published about 3 hours ago • 4 min read
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In 1996, the United States found itself at a political crossroads. The government had just entered the longest shutdown in its history at that time — a total of 21 days. This came from a budgetary standoff between President Bill Clinton, a Democrat, and a Republican-controlled Congress. Pundits predicted economic turmoil, and investors braced for the worst. Yet, contrary to widespread fears, the stock market not only remained stable but began an upward trajectory that would last for years (that is, until the dot com bubble).
Source: TradingView S&P 500 Chart
This highlighted a fascinating correlation — a divided government can foster an environment favoring the markets. While it's easy to assume that one political party or another holds the key to economic prosperity, historical data tells a different story — what truly drives market sentiment isn’t one political party. Instead, it’s far more nuanced. Let’s take a more detailed look at this.
Historical Influence of Politics on the Stock Market
Since 1957, Republican presidents have seen an average annual stock market return of 10.2%, while Democrat presidents are close behind at 9.3%. This margin may seem significant at first glance, but it’s important to remember that many external events, such as economic booms, recessions, wars, and global crises, influence these averages.
Source: Fidelity
A closer examination of the data reveals an even more critical factor: the composition of Congress. The division of power between the House of Representatives and the Senate often has a much larger impact on markets than the party occupying the Oval Office. Historically, the highest stock market returns—13.7% on average—have occurred under a Republican president with a divided Congress. Similarly, a Democrat president with a divided Congress sees nearly identical returns at 13.6%. These figures suggest that a balance of power in Congress can create a level of stability and predictability that markets tend to favor.
Why the Congress Matters More Than the Presidency
The checks and balances of the U.S. political system mean that the president cannot unilaterally enact sweeping changes without congressional approval. Any new laws, regulations, or tax reforms must pass through both the House of Representatives and the Senate. This creates a system of negotiation and compromise that often tempers down extreme policy proposals.
For example, a divided Congress, where one party controls the House and the other controls the Senate, often leads to legislative gridlock. While this may sound counterproductive, it can benefit markets by reducing the likelihood of sudden policy shifts. Investors value stability, and a divided Congress provides a level of predictability that encourages long-term planning and investment. In contrast, a unified Congress under one party may lead to more aggressive policy changes, which can introduce uncertainty and volatility into the markets.
Investing Strategies During Election Cycles
One of the most common questions investors ask during election years is whether they should sell or buy based on the anticipated outcome. Historical data provides a clear answer: staying invested is almost always the best strategy.
Over the past 23 election cycles, investing a lump sum at the start of an election year has yielded the best results 60% of the time. Dollar-cost averaging throughout the year was the second-best approach, succeeding 26% of the time. However, waiting until after the election to invest offered the worst results, with only a 13% likelihood of outperforming the market.
Source: Capital Group
Market performance during election years also tends to follow a predictable pattern. Historically, stock market returns are strongest during the first year of a presidential term. Returns often slow down in the second year, as markets adjust to these changes, before picking up again in the third and fourth years. This cyclical pattern reflects the market's ability to adapt to new administrations and their policy agendas.
Source: Morningstar
Economic Policies: What Could Change Under Trump’s Presidency
Trump’s proposed economic policies have significant implications for businesses as well as investors. Here are three of the most significant reforms proposed:
Corporate tax cuts: A potential reduction in the corporate tax rate from 21% to 20%, with an additional cut to 15% for companies manufacturing domestically. This could boost corporate profits and stock market performance.
Tariffs: Proposed tariffs on up to 20% of U.S. imports from China could raise consumer prices and incentivize domestic production. However, ultimately, it is you and I who bear these expenses.
Tax reforms: Plans to reinstate itemized deductions and create a universal child tax credit may provide financial relief to middle-income households.
From an investment perspective, these policies may benefit businesses by reducing their tax burden and increasing profitability. However, the long-term impact will depend on how these measures are implemented and whether they stimulate economic growth or worsen existing challenges, such as inflation and income inequality.
The Bigger Picture: What Matters Most
While it’s natural to focus on the presidency and its potential impact on the economy, it’s important to recognize that broader economic trends often play a much larger role in shaping market outcomes. Factors such as interest rates, inflation, global trade, and technological innovation are all drivers of economic growth and stock market performance.
For individual investors, the most important takeaway is to focus on what you can control. Building a diversified portfolio, maintaining a consistent investment strategy, and staying disciplined during periods of volatility are proven strategies for long-term success. Strengthening your financial foundation by tracking expenses, reducing debt, and building an emergency fund can help you weather economic uncertainty and take advantage of opportunities as they arise.
Final Thoughts
The presidency, while influential, is just one piece of a much larger economic puzzle. Historical data shows that markets tend to grow over time, regardless of political leadership. By focusing on long-term goals and maintaining a disciplined approach to investing, you can build a secure financial future — no matter who holds office.
That's it for this week. I hope you enjoyed this article. Let me know your thoughts by responding to this email - I read every single comment :)
Stay safe, stay invested and I will see you next week – Graham Stephan.
A 33 year old real estate agent and investor with over $120M in residential real estate sales. This is my way of sharing actionable ideas that will make you a smarter and wealthier investor.
