Market Performance and Control of US Congress
In US dollars. Growth of wealth shows the growth of a hypothetical investment of $1 in the securities in the S&P 500 Index. S&P data © 2022 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. Data presented in the growth of wealth chart is hypothetical and assumes reinvestment of income and no transaction costs or taxes. The chart is for illustrative purposes only and is not indicative of any investment. Source: Dimensional Fund Advisors
Congressional elections are coming this November, and moments of uncertainty such as these often lead investors to wonder if and how their investment portfolios will be affected by who controls the House and the Senate.
Dimensional Fund Advisors tracked the growth of a hypothetical investment of $1 in the S&P 500 from 1926 to 2022, through Republic and Democratic House and Senate control. With a near century of data, they concluded that making investment decisions based on which party is in control of Congress is unlikely to lead to better investment outcomes.
Their findings included:
“From 1926 to 2022, stocks trended higher regardless of whether Democrats or Republicans controlled the House and the Senate, or whether control was mixed.
Actions by Congress and the other branches of the federal government may impact returns, but other factors like geopolitical events, interest rate changes, and technological advances do too. Decades of research suggest that current market prices incorporate all of this information.
Shareholders invest in companies, not a political party, and companies focus on serving their customers and growing their businesses, regardless of what happens in Washington.”
Disciplined, long-term investors were rewarded despite which party controlled the House and Senate.
How can it be that politics doesn’t seem to matter to the markets? We know political parties have different views on taxes, economic stimulus, big vs. small government, international trade policies, etc. Yet, the data says this doesn’t seem to matter. Here are some possible explanations that we have heard:
The markets take a longer-term view than 4-year or even 8-year terms. The price of a stock reflects the present value of all future cash flows, which in most cases is well beyond the current president’s term.
The US economy is a difficult ship to steer and changes course very slowly. Data shows that the big policies trumpeted by each party as they get into office don’t actually activate as much change as expected over the long run. There are legal challenges, political changes, and public polls that tend to moderate changes. This is actually a strength for our country.
The current prices in the market already reflect expected outcomes and the risks of uncertainty. The market continuously places odds on who will win and the economic effects of them winning, and the uncertainty of outcomes. That’s why in most cases, 3 - 6 months after an election, markets are up – no matter who wins. Uncertainty pushes prices down. Certainty (with any political party) seems to push prices up.
We have an increasingly more global economy that impacts business. While we focus on US politics, global politics are also at play and tend to dampen the impact on the U.S. This is also why global diversification is important.
So, unless you have a very short-term horizon, we tend to remain invested in global equities, keeping clients diversified and using any corrections as opportunities for rebalancing and tax management.
