Separating politics from your portfolio: what to know about the stock market and economy post-election. In this episode of Friends Talk Financial Planning, join John and Bridget as they discuss how the stock market and economy are impacted by the outcome of the recent presidential election.
While political changes can create short-term market fluctuations, over the long haul, the stock market operates largely based on broader economic factors, not just who holds political office.
Many investors may feel uncertain and unsure about how to respond with their investments. However, know that sticking to a well-thought-out financial plan is often the best approach, as the market tends to go through cycles regardless of which political party is in power. Despite conventional wisdom, there's no clear historical correlation between a particular president's term and the stock market’s performance, and market outcomes are influenced by a variety of factors beyond just political control.
The stock market often acts as a leading indicator for the economy, with changes in the market sometimes signaling future economic trends. Bridget encourages investors to keep their emotions in check and avoid making impulsive decisions based on political outcomes, emphasizing the importance of separating feelings from financial decisions.
Ultimately, maintaining a disciplined investment strategy and focusing on long-term goals is key to weathering any political or market uncertainty.
Resources:
- Alliance of Comprehensive Planners: https://www.acplanners.org
- John's firm website: https://www.trinfin.com
We use research from Dimensional Fund Advisors. Here's their YouTube channel: https://www.youtube.com/channel/UCcd9t53faf29RPenKlKLa5A/featured
Here's their website (link to graph we discussed in the video): https://www.dimensional.com/us-en/insights/how-much-impact-does-the-president-have-on-stocks
TRANSCRIPT:
John: With the presidential election behind us, our thoughts now turn to what's next and what's going to happen in the stock market and the economy. And that's what we're going to discuss on this episode of Friends Talk. Financial planning. Hi, I'm John Scherer and I run a fee-only financial planning practice in Middleton, Wisconsin.
Bridget: And I'm Bridget Sullivan Mermel. I've got a fee-only financial planning practice in Chicago, Illinois. Before we start talking about the post-election stock market and economy, John, let's ask everybody to subscribe. It helps everybody else find us. Okay, so, John, we've got the election. We know who won. As we're filming this, we're not quite sure about the House, so we'll talk about that too. But what are your thoughts about the economy? No, let's start with the stock market. What are your thoughts about the stock market? What will the stock market do?
John: Yeah, so we don't know whether the House is going to be Democrat or Republican. The Senate has been taken by Republicans. The White House, of course, has been taken by Republicans with Donald Trump winning. Now what? Maybe a week or two ago we heard from folks, I'm sure you did too, about things like do we put all our money in a shoebox or what do we do with this stuff?
Bridget: Should we move to Canada?
John: Yeah, exactly. Those sorts of things. And you go, okay, now we kind of know what's happening, so now what? And as we're recording this, the stock market has certainly responded positively. Everybody thinks things are good, or it seems like from an investment standpoint anyway. And we've taken a look over the last several months and going back years on our show at the idea that it doesn't make any difference from an investment standpoint, who's in the White House, who controls the Senate, who controls the House, those sorts of things.
Listen, our capitalism does work, and the economy does work over the long haul. That doesn't mean any short period of time. But there are so many factors that go into what is the stock market going to do. Yeah, we've seen a little bump now because of the election. I think you might have mentioned, or somebody else told me, “I think that everybody's just happy that it's over.” We have a decision. Maybe it's because Trump's in office and the Republicans have the Senate.
Maybe it's because we have some certainty, and the market does not like uncertainty. So whatever happens this week, next week, next month, that to me is like white noise. It's minor news. What do we do going forward? For me the answer is the same thing we've always done. There're so many different factors that impact the stock market that the presidency is just one important but very small part of things. I don't think your take is a whole lot different than that, is it?
Bridget: No. I would reiterate that at my office, Luke said, “Yeah, this is the someone got elected bump.” And it's just the relief of it all. We'll post this, but we can look at all the presidents and how the stock market has done during all the presidents. And then it's really cool because you can click on the president's picture, and it'll go down to what it really looked like. Because a lot of times the presidents will experience change. For example, George W. Bush and Obama are like this.
The stock market was going down right at the end of Bush’s presidency, and then Obama gets the credit for going way up during his. But it's just kind of part of the fluctuations. And that's why what you're saying is that there's no statistical correlation at all between the stock market and the presidency. And so, the presidents like to take credit, though most of them don't take too much credit for the stock market, at least in public, because they don't want to have to take the blame when it goes down.
John: Right. And it's so easy to confuse the economy and the stock market. They are two separate things, but we often think of them as the same thing. If you ask any of your friends, what about the economy? They’ll go, “Well, the market's up.” That's how it gets connected. Right or wrong, that's how we think about it.
Bridget: I would say one thing about that, John, because I was reminded of it by a friend who had never taken an economics class. And I said, “Oh, I took two of them.” So one thing I learned in economics class, which I believe is still true, is that the stock market is what's known as a leading indicator of the economy, versus say, unemployment numbers. So the stock market might be saying, oh, things in the economy are looking up because the stock market's going up, but that's kind of six months from now versus unemployment is more like, oh, things weren't going so well six months ago. And so now, now it's filtering through that people are getting laid off. So it's possible that the stock market going up is a good sign that the economy will do well.
John: Yeah. The stock market sort of tells us what’s going to happen versus what's already happened, which is where the job reports might come in. There’s another thing that informs my opinion to stick to your guns. I’ve got clients and friends who give me a hard time, “I know you're going to say just stick to the plan.” Well, that's because we designed the plan for all times. It's not the plan except for when the economy is bad, except for when the market's down. No, we expect the market to go down, and we've got a plan for it. You mentioned Bush and Obama and that 16-year period when they were presidents.
There were so many complex things that happened. When the stock market went down during Bush's administration, was that because of the things that he put into place and his administration did? Maybe. Was it because of the things that were in place from the previous administration? And it takes time. This stuff doesn't happen instantaneously, whether it's law changes or policies. So does it happen immediately? Does it take time? You can make a case that every president is living off of the predecessor’s policies and what happened in there. You could also make a case that coming in and changing those policies makes an immediate difference.
And nobody knows the answer to that question. Look back at that chart that we just had up with regards to the presidencies. There're some other ways to slice and dice these numbers. But in general, what I hear from folks is, golly, when a Republican gets control of the White House, gets control of the Senate, that's good for the economy, meaning the stock market. But when you take a look at it historically, the Democrats have actually had a better performance when they've been in the White House. And you go, okay, that’s not what you would expect, that’s not the conventional wisdom. Yet that's what the facts are. And again, why is that?
Nobody knows exactly why that is, but that idea of, oh, geez, now that Trump's going to be in office, that's going to be really good. Maybe. Or when a Democrat gets elected, that's really bad. Well, maybe. I think as humans we want to tie causes and effects. This happened because of this. And it's just so difficult to do that, and it's unnecessary. When you take a look at how does the stock market do when Republicans are in office? Pretty good. How does the stock market do when Democrats are in office? Pretty good and actually even a little bit better.
But it's not like one does great and the other one's terrible. They both do pretty well. Look at that graph. It goes from down to pretty darn high no matter what goes on. So those are the types of things that inform my thinking. It's not just ignore what's going on and stick to the plan. That's not how we do it. It's what is the evidence. How can we make an informed decision? And despite the emotions that come, whether you're super happy that Trump got elected or you're disappointed and fearful that he got elected, from an investment standpoint, what's the market going to do?
I don't know. It's got a good start here the last couple of days. That doesn't give me any extra special hope that it's going to be great for the next four years, nor that it's going to be bad. It's not correlated. It's like how are the Packers going to do in the next four years? Whoever's president doesn't have a whole lot of impact on that. That's a stupid thing to say. You go like, “Duh.” And really, this whole thing about the stock market and the economy, though not quite as separate, is not too far from that in my mind.
Bridget: Yeah, they're just too complicated. There’re just too many factors.
John: Yeah, are you talking about the Packers or the economy?
Bridget: The Packers are slightly simpler but think about how hard it is because all the teams are trying to win. Some teams are more predictable than others. Living in Chicago, I can say that. So what is somebody to do? It's to realize what are my emotions right now? I'm disappointed, I'm happy. And what do those emotions make me want to do?
John: Right.
Bridget: Grab my savings and put them under my mattress. Put more money in the stock market. All kinds of decisions you could make based on the emotions of the moment. The winning strategy with the stock market is try to get your emotions out of it and just use your logic. Just plotting logic is what works. Or as one of my clients said, “Put it in the piggy bank and don't peek.” I mean, you can look every once in a while, and move things around a little bit, but it’s mostly this plotting logic.
Separating your feelings from your finances is key. One of the things that I love about finances is that they're intertwined with feelings. We can express our feelings through our finances. In this situation, it might be better to express your feelings with finances by donating to a political organization or getting involved in some activism or something like that. And not with your portfolio.
John: That's right.
Bridget: Yeah.
John: That's one of the things I love about our conversations. I tend to be Vulcan logic minded. Here are the facts. And they are the facts. But the reality is we act based on our feelings. And it's important to recognize that. The more that we can separate those things from a financial planning from an investment standpoint the better off we are. So I really love that view on things. Feelings and facts are two separate things. And act on your feelings in other ways, not with your portfolio. That's a great takeaway from our conversation today. Again, I'm John Scherer. I'm on a fee-only financial planning practice in Middleton, Wisconsin.
Bridget: I'm Bridget Sullivan Mermel. I've got a fee-only financial planning practice in Chicago, Illinois. We're both proud members of the Alliance of Comprehensive Planners or ACP. If you're looking for an advisor in your area, both John and I are taking clients. But if you're not in our areas, check out acplanners.org.
John: And don't forget. Hit that subscribe button.
At Sullivan Mermel, Inc., we are fee-only financial planners located in Chicago, Illinois serving clients in Chicago and throughout the nation. We meet both in-person in our Chicago office and virtually through video conferencing and secure file transfer.
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