Election years tend to stir up a lot of emotions and 2016 looks to be no different. In addition to deciding between two very polarizing candidates, the 9th Supreme Court justice needs to be confirmed as well (which likely won’t happen until the next President is elected). Many economists, journalists, and investors try to draw parallels between election years and stock performance. Below are my thoughts on the impact of a potential Trump victory and your stock portfolio.
First, a look back
Since 1945, stocks tend to perform positively during election years. Slicing the data by political party shows that when a Republican is elected president, stocks return 12.5% vs. 7.0% when a Democrat is elected. However, during the first year in office, stocks gained 1.9% with a Republican president vs. 18.7% with a Democratic president. While this data is interesting, I think of it as mostly noise and not something actionable. The takeaway for me is over the last 17 presidential election cycles, stocks generally react favorably. Thus, whichever party wins shouldn't be disastrous for our economy.
So what will happen if Trump wins?
Quick hits on the possible economic impact of a Trump presidency.
- Given Trump’s stance on immigration, it is likely industries that depend on cheap labor (think agriculture) would suffer.
- His current tax plan would drastically cut tax revenues to the IRS in the short-term with the hope that increased business investment would drive our economy forward in the future.
- With the goal to increase jobs in America, Trump has proposed a 35% tariff on imported goods from Mexico and a 45% tariff on goods from China. This may lead to more jobs in the US, or it may lead to more expensive items that Americans are already buying. Adios cheap Tequila!
A split Congress?
Bear with me here as this gets a little technical. Currently the Republican party controls both the House of Representatives and the Senate. Based on the current seats up for election in the House, it is likely the Republicans will remain in control. So let’s turn our attention to the Senate, where 34 seats will be contested in 2016. Of those, 24 Republicans are on the hot seat and Democrats need to gain only 5 seats. Historically, Democrats have done well in presidential election years, which could lead to a divided Congress.
Even if the Republican party controls both Congress and the oval office, Trump may find it difficult to push his initiatives through. (He doesn’t exactly play well with others.)
There is a lot of noise out there in the financial markets and as long-term investors, it is important to avoid getting caught up in the emotions of the moment. The Constitution forms the backbone to our American Democracy and it is designed with appropriate checks and balances. If Trump becomes President and inherits a divided Congress, this ironically could frame a positive backdrop for stocks. A divided Congress could lead to political gridlock and a weak presidency for Trump, which favors businesses and investors as stocks prefer environments with stability.
Whoever gets elected in 2016 will stay in office for 8 years at most. It is important to remember that we are investing for the rest of your life. I believe that extreme fears regarding the election and capital markets are over-blown and a diversified, low-cost, efficient portfolio is a cornerstone for long-term financial success.