A Day in the Life

These professionals spend their days in a routine blending analysis and advocacy. They review the latest reports to prepare for the day ahead, collaborate with trusted advisors, closely monitor active threats, and always advocate for opportunity.

Their schedules are packed with briefings that keep them informed and ready to face an array of challenges demanding immediate attention and long-term strategic planning. Public engagements and media appearances are crucial; these are the platforms where they translate complex information into digestible, actionable insights for the public.

Their roles necessitate a display of confidence and authority. They must project calm and control, reassuring the public with their expertise despite the inherent uncertainties of their predictions. They are tasked not only with interpreting vast amounts of information but also with influencing public perception and readiness through their message. They navigate the delicate balance of influencing events where they can and managing reactions to those they cannot control.

This is a day in the life of broadcast meteorologists around the world. Who did you think we were talking about?

Presidents and Their Portfolios

This may sound surprising, but Presidents have about as much of an impact on financial markets as meteorologists have on weather patterns. The meteorological and financial forces of nature are overwhelmingly complex and intertemporal—far outmatching the policy desires of any single administration.

Presidential elections are often perceived as pivotal moments for financial markets. This perception stems from the belief that elections can herald significant changes in policy that directly impact both the regulatory and fiscal environment within which businesses operate.

However, the relationship between presidential elections and market performance is multifaceted and mediated by a wide range of factors. Global economic trends, such as changes in commodity prices, shifts in international trade policies, and significant geopolitical events, often have more pronounced impacts on financial markets than domestic politics.

In fact, a variety of studies suggest that capital markets prefer divided government in which the checks and balances of the executive and legislative branches prevent drastic policy shifts, thus maintaining a level of market stability and predictability for investors.

Anticipation and speculation leading up to elections can cause increased market volatility. Investors and financial analysts attempt to predict election outcomes and their potential impacts on various sectors and this speculative activity can lead to market movements that are decoupled from the underlying economic fundamentals.

If anything is certain, predicting the exact impact of election outcomes on financial markets is fraught with challenges. There are simply too many competing variables and time constraints to honestly attribute causation. Policy effects are notoriously difficult to assess due to the concepts of ‘inside’ and ‘outside’ lags in policy implementation. The inside lag—the delay in implementing necessary policy changes—and the outside lag—the time it takes for policy changes to affect the economy—make it difficult to directly correlate specific policy decisions with immediate economic or market outcomes​​.

A Look Through History

Since 1929, investment portfolios have experienced wildly different outcomes under various presidential administrations. Using the 60/40 asset allocation consisting of 60% equities (stocks) and 40% fixed income (bonds), we can see the vast risk and reward dispersion across the past fifteen administrations.

The Obama, Reagan, George H.W. Bush, and Clinton administrations stand above the others with 60/40 allocations that significantly beat the performance of other administrations’ 60/40 portfolios on either an absolute risk or return basis.

On a risk-adjusted basis, the Obama, Truman, and Trump administrations had the best combination of risk and return according to the Sharpe ratios for 60/40 portfolios during their time in office, whereas 60/40 portfolios during the Nixon, Carter, and George W. Bush administrations had the worst combination of risk and return with Sharpe ratios ranking among the worst.

Overall, 60/40 allocations under Democrat administrations returned 9.5% each year on average with an annualized volatility (standard deviation) of 11.2%, while Republican administrations returned an average of 6.9% each year with an annualized volatility of 13.8%.

However, the clearest observable correlation in this data is best expressed by a quote from Thomas Paine:

“What we obtain too cheap, we esteem too lightly; it is dearness only that gives everything its value.”

The tumult of Nixon and Carter forged the legacies of Reagan and George H.W. Bush, while the tribulations of George W. Bush ushered in Obama’s era of growth. Yet, the true origins of glory and blame often run deeper than the recent past.

Like meteorologists, some presidential candidates and sitting presidents moderate the narrative around the prevailing conditions, while others opt to exacerbate and intensify them—even though neither group controls the overwhelming forces precipitating the actual climate.

Tax Policy is Personal

In reality, policy impacts investors on a personal level, but typically more at tax time than directly in one’s investment accounts. As such, it is beneficial to survey the current policy proposals of today’s leading candidates.

Joe Biden’s potential second term could see increased taxes on the wealthy and large corporations to fund enhanced social programs, potentially impacting small business owners with higher operational costs but aiming to reduce economic inequality. Biden also proposes expanded healthcare initiatives and investments in infrastructure and green energy.

On the other hand, Donald Trump’s economic strategy for a second term focuses on extending the 2017 tax cuts, further deregulation, and “America First” trade policies. These measures are designed to reduce operational costs and protect domestic industries.

Navigating these potential changes requires strategic planning from businesses and adaptability to the evolving regulatory and economic environment. Individuals must also consider how these policies could influence their employment, healthcare, and overall financial health, underscoring the unique impact presidential elections have on both micro and macroeconomic scales.

Conclusion

For investors it is crucial to stay informed not just about election outcomes but also about broader economic indicators and policy developments. Engaging with comprehensive financial analyses and maintaining a diversified investment portfolio can help navigate the uncertainties of election-related market fluctuations. Although we recognize the overwhelming influence of global trade and geopolitics on the investor experience, we take a holistic view of the economic and financial landscape, collaborating closely with clients and their accountants to deliver positive outcomes spanning diverse political climates.  

As always, please do not hesitate to engage with your Fiduciary Investment Advisor should you have any questions or concerns regarding the upcoming election cycle or investments and financial plans.