How can the presidential election affect investment decisions? – Insurance News

President Joe Biden’s State of the Union message officially kicks off the 2024 presidential election. How can a president’s election affect investment decisions?Here’s one way he looks at this question through the lens of history.

When the Bank of New York approved a loan to the U.S. government to help pay President George Washington’s salary ($25,000 a year), it was the moment when corporate business and government business became inextricably linked.

Since then, government borrowing has continued, with investors forever watching government actions for clues about where and how best to put their money. This guessing game gets even more intense every four years as we try to figure out how presidential elections affect our investment decisions. There’s nothing wrong with that idea. Investors should of course consider different government policies and their impact on different sectors, as government support and restrictions can have a significant impact on market trends and investment outcomes.

Government support is not a good predictor

However, it is important to keep in mind that, contrary to popular belief, the success of an investment cannot be predicted based on government support or opposition.

For example, U.S. Steel’s stock price initially rose in 2018 on expectations of government-imposed steel tariffs. Despite the optimistic outlook, the stock price and the stock prices of similar companies fell significantly after the tariffs went into effect.

Second, Exxon stock has quadrupled in value, even though, like most fossil fuel companies, it is not supported by the current administration.

“Presidents may have influence through policy, but their overall impact on market returns is based on political affiliation,” said Apollo Lupescu, vice president at Austin, Texas-based Dimensional Fund Advisors. “It’s not significant enough to make an investment decision.”

In a recent webinar titled “Assessing the Election: Uncovering the Stock Market’s Political Dance,” hosted by PBMares Wealth Management in Williamsburg, Virginia, Mr. Lupescu said that many media and consumer We discussed how economic markets move in response to these changes. He talks about government policy and election year campaigns (Democrats are better budget managers, Wall Street supports Republican administrations, etc.).

Emotional reactions to election results

What about the emotional impact of elections and other political events on investing? “Investors’ emotional reactions to political events and party control can influence their perceptions of market performance.” ” Lupescu said. “Even though the data show no significant difference.”

Lupescu presented data showing that the stock market has produced positive returns in 20 of the past 24 presidential election years, going back to 1932.

“If anyone says election years are the worst for markets, that’s not what the data shows,” he said. “In fact, the market went up the vast majority of the year.”

The question of what drives markets in an election year is far more complex than simply the ongoing presidential campaign. Lupescu said other factors such as economic conditions, interest rates, inflation and corporate earnings have a significant impact on the performance of the stock market in general.

“An analysis of market performance under various presidents since 1969 reveals that there is no consistent correlation between presidential party affiliation and market returns,” he said. “This suggests that other factors are at play.”

But what about spending and borrowing? To be sure, budget decisions made or proposed by presidential candidates have an impact on the economy. The national debt is currently around $32 trillion, so this will have an impact on the economy.

How to view debt sustainability

Well, yes and no, Lupescu said. Over the past 30 years or so, US debt has increased eightfold. However, there is more than one way to think about the United States’ enormous debt and interest debt.

“The absolute true measure of how sustainable our debt is is how much it actually costs us as a country,” he said. “It’s not the total number itself, but what percentage of economic output we spend paying interest on that debt.”

Remarkably, Lupescu said, in 1990, when the national debt totaled $4 trillion, the percentage of gross domestic product devoted to interest payments was about 3.2 percent. However, it turns out that by the end of 2023, the debt would have reached a staggering $32 trillion, with just 2.4% of the country’s economic output being used to service debt.

“In other words, even though we have much more debt, the actual financial burden is much less,” he says. “We’re exactly where we were in 1999, which means the economy is much bigger, and it’s not necessarily strange to have a lot of debt. The headlines are about this huge, bad $32 trillion debt. But we don’t have to pay it all at once, just like you don’t have to pay it all at once on a 30-year mortgage.”

Lupescu said politics and political affiliations can be highly emotional and can influence investment decisions.

“It’s okay to acknowledge those feelings,” he said. “But the smartest investors try to untangle their emotions and make pragmatic decisions based on data and evidence.”

What is the conclusion?

“There are certainly far more important events happening in the world than the U.S. presidential election on which to base investment decisions,” Lupescu said.

Doug Bailey is a journalist and freelance writer living in the Boston suburbs. You can contact him at: [email protected].

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