We’re entering into another election cycle. Undoubtedly the media coverage is going to be scrutinizing every detail and projecting their spin on what the potential outcomes will mean for the economy and financial markets.
Regardless of political views, it’s important to remember this is what the media is paid to do. They want as many eyeballs as possible on their coverage, and will basically say whatever it takes to accomplish this.
However, as investors we have to set politics aside and ask the question, does the outcome of the election really matter to long term investors?
WHAT DOES THE DATA SAY?
Fortunately, we have years and years of historical data now to look at market returns under all sorts of political outcomes. Whether Republican or Democrat President, unified or divided congress, the markets have continued to march upward and to the right over time. If you enjoy diving into the weeds on the data here is a link to some research by the Hartford Funds, showing stock market returns with different political parties in power.
While past performance is no guarantee of future results, I think we have to look at this data and say there is little to no correlation between historical stock market performance and political parties in power.
WHAT SHOULD WE FOCUS ON?
While they aren’t as much fun to talk about, the bigger items impacting the economy right now are inflation and interest rates.
At the beginning of the year, I wrote about why I think market expectations for interest rate cuts were overblown. In my opinion, it didn’t make any sense that the Federal Reserve would start cutting interest rates with a strong economy and inflation still running well above the Fed’s 2% target rate.
The factors that I wrote about which are keeping inflation high, and in turn interest rates higher for longer remain intact today:
- A strong job market
- Low consumer debt delinquencies relative to historical norms
- Corporations locked into low fixed rate debt
- Fiscal spending that is stimulating the economy
- Robust consumer spending, especially on services like travel
Barring an unforeseen event out of left field, I don’t believe the federal reserve will seriously begin discussing interest rate cuts until after the election in November. They don’t want a policy decision on interest rates to be perceived as political. The strength of the economy is giving them the ability to take their time, while still leaving the door open for interest rate cuts before then if needed.
LEAVE POLITICS FOR THE DINNER TABLE
Corporate earnings have continued to exceed expectations in the beginning of the year, and I believe investors should continue to focus on earnings instead of the election heading into the second half of the year. It’s everyone’s constitutional right to get out there and vote, but remember to leave the politics to dinner table conversations and out of your investing decisions!
