How do elections effect the stock market? What should you do with your investments? Certified Financial PlannersTM Bridget Sullivan Mermel and John Scherer discuss how to think through this emotional time.
Stock market and election--does it matter?
Bridget: Hi. We're going to talk about how much the upcoming election matters for your investments.
My name is Bridget Sullivan Mermel, and I'm a fee-only financial planner in Chicago, Illinois.
John: And I'm John Scherer. I'm a fee-only planner in Middleton, Wisconsin. And I'm excited about today's episode of Friends Talk Financial Planning.
One of the things you get to, now, October, what, 3 or 4 weeks before the election. And I'm hearing a lot of people, Bridget, ask about, ask about or make comments -- it's not even questions. t's sort of like, Let's wait ‘till after the election and find out what goes on. And after the election, we can do these things. And so the idea. Like, hey, the election is important for a lot of reasons, but specifically for money and for financial planning. I'm getting those.
I don't know if you get questions about the election or things as to how it affects people, your clients’ finances.
Bridget: I think people think that it does affect them. I was talking to a friend. And the friend said, I'll sell my House after the election. And I was glad, because that’s not too long, and I felt that this person needed to wait for her own personal reasons. But to me, that wasn't…
For reasons that we're going to be getting into, I felt like it's a red herring to be thinking about the elections and then taking action.
John: Yeah, I appreciate that so much. To me, it's one of the things that feels like those two things should correlate, selling my house, making an investment, doing these things. And really, we talked a little before you jumped on the air here. And I don't think it makes any difference. And I think you said the same thing.
So one of the things I wanted to share here is some of the data. I really look at the data on things. And so here's a neat little thing from Dimensional Fund Advisors. It talks about presidential elections and some of the history with things.
And we like to look to make a connection. And the blue bars in here are Democratic presidencies and the red bars, of course, Republicans. And the thing I take from this is that over time the markets go up, and it kind of doesn't make any difference.
I've looked at these numbers pretty closely. And there's more data behind them, of course. But to try to find out the pattern to identify what to do about the future has so little to do with who is president. There's so many other factors. I think it says over here, there's a thousand other factors. And that's exactly it.
It feels like we should… the president’s is important, whether it's a Democrat or Republican, or whoever. And my takeaway is like: listen, over time, in 20 years, based on history, you're going to have more than… the markets are going to be higher than where they are today. So stop trying to use this as a guessing tool for that.
I don't know if you use or something similar to this when you talk with people, Bridget. But how do you handle that?
Bridget: Well, it's very hard, because it seems like people want it to matter. And the politicians both, on either side, will have you think that it does matter. So there's a very strong story being told out there in the world that it matters. Like who's the president matters a lot, or which party is holding congress matters a lot in how the economy does, or how the stock market does in particular.
So that's another issue too, is that the economy and the stock market are two separate things. And they get conflated in people's minds, too. And so the economy… I don't have… We're just talking about the elections and if that matters. I don't know if who the president is really affects the economy. If you get into these data points in here, in this graph, it'll show you, and it kind of doesn't matter either. Both parties have their good points and the bad points as far as the economy goes.
John: That's right. When you describe and talk about the economy and the markets, that's probably another full discussion to have on that, because it's really interesting how those come… As you're describing that to me, Bridget, it reminds me of… now we’re in football season, and the quarterback gets all this credit when his team wins, and when his team loses…
Yeah. I mean, it's an important part of the whole process. The president is an important thing. It matters who the president is. But not that direct correlation that we might like to make with things.
Bridget: And the stock market grows over time, over a longer period of time than even if somebody's in for two periods matters. So the stock market generally goes up over the course of 15 years. But over the course of 8 years, it might be flat. It might be down, as when you dig into some of these numbers you see.
John: That's right. It's like in our world, short-term is anything less than 10 years, from an investing standpoint, right? That's less than a “presidency plus” is a short term thing.
John: One thing I wanted to point out on this is that I hear a lot of people, whichever side, “If the other side gets elected, here's what's going to happen.” And I hear a lot of things like, “Well, Geez, the Democrats, when they get in office, because they focus on the environment and the social and other programs, that they're less good for the market.” And it's interesting in here. And I think it's just a statistical anomaly. But you look back in the Nixon years here where the markets were flat. And then in the W. Bush years here where the markets were flat. And the evidence doesn't hold true. Like typically the Republicans are pro-business and the Democrats are less pro-business. And just factually you can argue about the details, about the whys or one thing. But when you look at what happens, it's like: listen, the markets go up in general. The markets go up like 75% of the time, and it doesn't matter who's in office.
John: And there's one thing. You shared this with me, and I think I put it on the next screen, another similar analogy. And what I hear people talking about is that that big picture is really useful. In a thing like this, and in the big picture, any one instance is a bump in the road. But then specifically today, it's important to me today. I’ve got money to invest now. Do I roll my 401K over? Do I sell my house? It's important today! And this was really interesting. I had not seen this before you shared it. And the green year, that's the one that I focus on in this. It’s what's going to happen in the year after the election. So next year what happens. And it's interesting as you go back. And again, not surprisingly, something like two thirds or three quarters of the time in the green years the market’s up. But what I thought was really interesting was going back into the ‘50’s and ‘40’s, the times when the market was not up is almost all when the Republicans were in office. And again, this is not political.
John: This is just… like, factually here's the things. I'm surprised at that. That's not the message that I've sort of thought over years and years of listening to the pundits. I would have expected it to be the other way around. And I think, again, just a statistical anomaly. But the facts are really interesting compared to the stories.
John: So I don't know. Do you use this with clients?
Bridget: If you have 8 data points here, that's not enough to create a trend. I just want to point out to you here that the grey bars are the average return during the election year. So the grey bars represent like 2020, like our election year now. And the green is what happens in the year after. So what this says is that usually during the election year it's decent. And then usually in the year after that it's decent. And then sometimes it's not. So there's not a real story here.
One thing when I was researching for this show that I did find, which seems to be correlated, is if the economy is down, the incumbent is less likely to get elected. Now I don't know if you need to research data to come to that conclusion, because the state of the academy… So that's the kind of thing that you might be able to find some causality with. Not the stock market, which really affects a smaller subsection of people than the economy in general. So… go ahead…
John: Well, let me just say… I'll stop, we don't… Interesting to see those things. So circling back to sort of our premise is: why is this presidential election, what's important about it for your investments? And the answer is: it's not. We just we can't predict. We don't know. It's a red -- you used the word red herring, or the term red herring.
Bridget: Yeah, and I think it's important to talk about: why do we do this? Why do we tell these? We formulate stories. And I think this goes back to our cave person brain that's trying to figure out how to act in the world. And so we reflect on the past. We figure out a story, because that's easier for our heads, our brains to remember. And then we project that story out into the future. And the story that the elections matter for my investments is a very… it seems logical, and it seems to make emotional sense. But we don't worry about those crazy facts there. But we don't get those… because from an emotional standpoint, I think it does. It makes sense. But what we're trying to say is: understand you're inbred software that you have come equipped with is to tell these stories. And one of the reasons that people hire advisors like us is so that we can help them think long-term. We're not… People are not great long-term thinkers. That brain is not great at thinking over 10 years and over 15 years. So people like us say, “Okay, we're looking at the data, and the data says, “Don't worry about this.” And it helps people to hear that from someone else. And actually, frankly, it helps us. A lot of advisors have their own advisors, because it's easier to tell somebody on their own behalf. It's not because I'm so… well, I do look at this and I am smart about it, but it's a natural human tendency.
John: Yeah, it’s not the secret sauce.
Bridget: Yeah, it's a natural human tendency to not be that great at long-term planning. And when your emotions are involved, it can be even worse. And it can depend on these stories that we tell ourselves, which are not supported by the facts in this case. And sometimes they are supported by the facts. But in this case, they're not.
John: I really appreciate that. I don't think myself about the “why do we think this” sort of thing. I look at the facts. No, there's reasons for these stories. And you reminded me in hearing about that, Bridget, about that our natural tendency when something's important -- the presidential election is really important -- but then we try to be able to control what that means in various places in our lives.
So there's other places where it's a really important decision, and so I want to control the variables. And the idea that… And we can measure. One of the things in the stock market, we can measure the results, right? Other things aren't as measurable as: how did the market do next year? And so it's our natural tendency to tie these things together as something I can see and something that's really important. And then the reality is those things are in two separate things that, yeah, they're both important, but they don't correlate, and it's nothing we can control. It sort of like what's going to happen is going to happen independently. So that's really interesting. I appreciate that view on things.
Bridget: I also think that we have more of a tendency to try to create these stories because there's so much input towards us, especially if you happen to be in a swing state. (I don't have to tell you, John!) That there's so many… the political advertising depends on evoking your emotions. And so your emotions are evoked. So your whole emotional system is on high alert and thinks that the election is important -- and I believe the election is important -- but that doesn't transfer to this conclusion that it matters for your investments.
John: So that sounds like a great place to wrap things up on this conversation. My takeaways -- we always try to get our takeaways -- my takeaways are that the election is important, but it's not for your investment, for your selling your house. We talk about things being endogenous, meaning internal decisions, those things, how you should invest, should you sell your house. That's much more important than the exogenous, or external, things. So my takeaway from this for people, for our viewers, is: listen, watch the election, and pay attention, and get out and vote for other purposes. But when it comes to your money, this is just a road, a speed bump that doesn't make a big difference. And there's nothing you can do about it even if you knew what was going to happen. So it's interesting, but not material to your investments and your long-term financial planning.
Bridget: Well said.
John: What about… what takeaways do you have?
Bridget: I think you wrapped it up really well. But the thing I like that you said the most is, “Please vote.”
Bridget: So don't vote on the basis of your finances. But as a country as a whole and a citizen, please vote.
John: Yeah, that's right.
And so we want to wrap things up here and say if you enjoy these conversations and these sort of topics, one of the things Bridget and I are is members of the Alliance of Comprehensive Planners. And you can find them online at acplanners.org. And if you're looking for a financial planner that has some of these philosophies and sort of holistic, whole life components to financial planning, take a look there to find that advisor near you. And until next time, look forward to talking, Bridget.
Bridget: Thanks, John.
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.