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Creighton finance professor: investing in election outcomes can be harmful to your wealth

Stock MarketAs the 2020 election draws nearer, voters will receive final reminders from campaigns about how one candidate’s policies will help pad retirement accounts while the other candidate’s will hinder their performance. Robert Johnson, PhD, CFA, CAIA and professor of finance in the Heider College of Business at Creighton University, advises investors to not let politics influence long-term investment strategies.

“Investors in the stock market tend to get laser-focused on the economic policies of the candidates in an effort to forecast how they think their policies will affect the economy and capital markets,” Johnson said. “Paying too much attention to politics can be harmful to your wealth.”

In reviewing stock market returns during President Donald Trump’s administration, and during the eight years Joe Biden served as vice president in President Barack Obama’s administration, Johnson said the candidates bring different approaches to the economy but have delivered similar results. According to Johnson, the S&P 500 returned an average of 16.2% during the first three calendar years of President Trump’s first term. During the Obama administration the stock market’s returns were 14.9% annually.

“The reduction of taxes, particularly corporate taxes, was certainly a boon to the stock market during the first term of the Trump administration. Limiting regulations in the short-term also has been a big plus to the stock market,” Johnson said. “The biggest continuing threat to the economy is the failure to get the coronavirus under control. President Trump’s handling of the pandemic has been a negative economic factor because it caused a lot of pain and friction in the underlying economy. If there had been a more concerted and unified response to the pandemic early on, my belief is this race wouldn’t even be close.”

Under a Biden presidency, Johnson said corporate tax rates would be likely to rise, which in the near-term could lead to lower stock prices. But he considers a Biden administration attractive to investors due to favoring a more open economy prone to less uncertainty caused by trade wars, tariffs and economic isolation, he said.

“Stock prices are based on expectations, not realizations. The mere fact that the stock market has advanced at the same time Vice President Biden has gained in the polls supports the notion that the markets aren’t fearing a Biden presidency—they actually seem to be embracing it,” Johnson said.

While Johnson does not expect the election winner to impact a long-term investment strategy, as vote-by-mail reaches record numbers this election season, he does anticipate a short-term impact on investors if the winner of the U.S. presidential race goes undetermined for an extended period of time.

“A protracted fight over close elections results would likely not have a large impact on the U.S. economy and household finances, but it would probably have a substantial negative short-term impact on the financial markets,” Johnson said. "The old adage is, ‘Markets dislike uncertainty.’ We would likely see a precipitous market drop and marked increase in volatility in the short term.”

Johnson said a common misconception of investors is the view that the political gridlock in the federal government —which occurs when different political parties control the White House and the legislature —is good for the market. The concept is that under gridlock, there is less chance of enactment of significant fiscal policy actions, which tend to disrupt financial markets. Conversely, political harmony between the political party of the president and majorities of the House of Representatives and Senate, tends to be viewed negatively, he said. “This time of year, the U.S. airwaves are filled with claims that investors should welcome political gridlock as a harbinger of higher future returns,” Johnson said. “Surprisingly, the evidence indicates that political gridlock and political harmony have resulted in virtually no difference in returns.”

Johnson said comparing investment returns solely on what happens in the markets during a Republican or Democrat administration is problematic because it is too limited and represents a relatively small sample size.

“Looking at the political party of the president ignores too many other important variables, such as wars, economic global recessions, or, like this year, pandemics,” Johnson said. “My research shows that the Federal Reserve policy is a better indicator of market performance. The bottom line is the president gets too much credit when the economy is booming, and too much blame when it is lagging.”

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