Political Economy of Financial Markets:
How do financial markets react to political events such as elections or regulatory decisions? And what are the political repercussions of financial market events?
Jeff Powell, CIO, Managing Partner & Founder of Polaris Wealth & Jeremy Witbeck, Partner at Polaris Wealth, discuss the relationship between politics and the financial markets.
Welcome to today’s Polaris podcast. I’m Jeremy Witbeck, partner of Polaris Wealth. And I have Jeff Powell with me. Jeff is the managing partner and the Chief Investment Officer. And he’s going to be speaking with us today on the financial markets and the impact that the election can have on. So Jeff, welcome. Good morning.
So this is a topic that I’m actually excited to talk about with you, because it’s something that we’re hearing a lot about, certainly, it’s covering, or it’s being covered rather by the news. And so very eager to hear your insights and thoughts as to what the elections are going to mean for the market.
Yeah, I started to talk about it. One major disclaimer before we kind of get into anything here.
We have clients of every political voice, we’ve got people that are far left, we’ve got clients that are far right, we’ve got everybody in between.
The one thing that I want to make sure that you know, while listeners listen to this, is that we keep our politics out of these kind of conversations. And we also keep it out of the way that we manage money. We can’t afford to be red or blue or purple, we have to be white, with what we do, we have to be absolutely agnostic to what goes on politically, because we don’t want our own personal beliefs to kind of filter into the way that we manage money. So when you listen to this, today, what we’re going to be hitting on is a lot of facts. Please don’t read into it and to do more than them just what is going on historically, within the marketplace.
Yeah, thanks for sharing that. I know, it can sometimes be emotionally charged when we talk about the market. So I appreciate the perspective that we’re just going to look at the data and understand what that means to us as investors. Exactly.
Yeah. So to start off with a soft naked share with us, just in general overview, what typically happens to the market in a normal political year? Yeah, so let’s, let’s kind of map this out. So the statistics that I’m going to run through are actually from 1900. To present, and I guess I can’t be in the present, because we have another election yet. But up to the 19, or the 2016. election.
And really what we’re looking at is just talking more about trends than anything else. So an election year, if we’re looking at a four year presidential cycles, actually not a bad year. It’s the second best of Europe. From a spiritual standpoint, it’s just a little bit more choppy than most years where you find uncertainty coming in with you know, will the current president remain? Will there be new people in place that years, by far, you know, the more volatile because of that. But if you go back and kind of look at the other years, the first year of a presidential cycle is, you know, normally the president funding to as is sort of the second, really, the third and the fourth years of a presidential cycle are really where you see the great majority of the performance.
I say, and so when you look at that does who wins have an impact? And on the market? Yeah, absolutely. I mean, we have a breakdown of, you know, incumbents about Democrat and Republican if they win or lose from a historical standpoint, again, going back to 1900. Obviously, since we don’t have a Democrat in office right now, it’s a little less relevant to talk about, but from a historical standpoint, and again, looking at where we are in early October of 2020.
If you’re looking at the incumbent Republican Party winning the presidency, the markets rally off of that, and it’s a pretty significant rally, actually the strongest of all combinations versus if the incumbent Republican Party loses actually the worst performance, and you historically have seen that drop occur in October, so pre election, as well, you are you’ve historically seen the drop off in the marketplace. And then once the election happens, you’ve seen the markets trade sideways through the rest of the year. Just because, again, you’ve got a lame duck president in place at that point.
Jeff, I appreciate you sharing that with us. Do you mind walking us through what the polls are indicating and I know there’s been a lot of emphasis recently
on who’s going to win the president. But there’s a lot of other offices that are also up for forgetting. Phil, can you talk about how the Senate and the House also, potentially, in fact, the market and how the the entire US legislative branch, how that’s going to factor into what we would expect going forward?
Yeah, absolutely. I mean, so right now,
I’m looking at kind of a combination of polls put together that show that Biden has had a lead a pretty much through the, through the the nomination process and up to President with a about an eight point lead, which from a historical standpoint, as a pretty substantial lead. That being said, we saw what happened with polls on the 2016. Election with Clinton, it’s pretty hard to to kind of believe in polls until Election Night, we don’t know who’s going to happen, you know, who’s going to be elected, you know, based upon polls, although, again, from a historical standpoint, it definitely has been impactful.
The one thing that with you asking about the the rest of it, I mean, really,
you know, how the Senate and how the Congress plays out, also has a major impact on the stock market. And people think that, you know, the presidency is the most important and it is, but, you know, presidents don’t make bills, they can certainly influenced them, but those come through Congress and Senate. And, you know, again, same thing with tax bills, and so on. So really, what you’ve seen from a historical standpoint is when you’ve got balance of power, the markets have done best, having one party controlling all power, the markets don’t do as well. So again, from a historical point of view, only, please do not read into this. Having a democrat as a president with a congress that’s controlled by the republican party has done the best. The next best grouping is flipping that a republican president with a democratic controlled Congress. And then like I said before, the worst is when you’ve got
all power with one party, they basically are able to railroad through whatever they want to, and the markets from a historical standpoint have not reacted well to that.
Yes, that’s very interesting. And a lot of this feels very reminiscent of 2016, where there’s a lot of certainty at the time that was being quoted on how the election was going to go. And clearly the election went very different. That time, curious if you could share your thoughts as to whether or not the polling data should be trusted? And if or if not, what an investor should do about that potentially, with their own financial circumstances, and certainly a portfolio
Yeah, I mean, with regard to this year, I mean, obviously, you know, from a historical standpoint, the polls have not been an accurate, I think that, you know, from what we’re running into with with this particular election, the fact that there have been threats to
taking the court, the outcome of what’s going to happen with the election, could add a significant uncertainty, though, to the markets after the election, leading up to the election, again, I think it’s going to be kind of everything.
status quo, so to speak, of the craziness that we’ve dealt with so far this year. I mean, this market has been led purely by sentiment, I see it being completely led by sentiment into the markets. And really, again, depending on if there is a need for transfer of power, and how that transfer of power operates, will definitely add to the volatility of the marketplace if there is a question of the legitimacy of our actual election. So if there is something that goes on within it, I would say you probably want to think about getting a little bit more defensive going into the election with having a larger amount of uncertainty going into it.
Yes, it’s very interesting that you mentioned that just because there has been some talk about on election night. Typically, we know who’s going to win and in this case, with there being so many absentee and melon ballots, that we may not know who wins. So it’s the first time that’s ever happened where there’s been a an election that could potentially be contested for some time. Oh, there’s only really been one other election that comes to mind for me and that was back in 2000. With with a eventually having a
Bush winning the election over bore. But if you remember back in that election, we had a very similar situation where the there was a question of what happened within Florida and within specific counties. So originally, gore conceded as Then he took back his concession,
Astro recounts in Florida, I actually got a few friends of mine from from London who reached out to me explaining that since we could no longer rule ourselves properly, that England was taking us back,
which I thought was a quite a funny statement. But it was the first time in a long time that there would been a content contention afterwards. So the markets, you know, the markets were already volatile. At that point, we already in the beginning of a downturn in the market, so it’s kind of hard to read into was a purely election, but it didn’t help us put it that way to, to the volatility that we were experiencing in 2000. Without election.
Yes, that’s very interesting. So then, Jeff, if we kind of take a step back, and we look at all of this, what should we do as ambassadors then with our portfolios? And I mean, should we be making some significant changes going into the election? Should we all just kind of calm down, take a breather, but what, what’s going to be the best long term approach as we go into the election, and then ultimately into 2021?
Well, one of the things that we always talk about is, is, you know, take a deep breath. First of all, I mean, we’ve had a client again, after last election, that were ecstatic, we had people that were threatening to leave the country,
you know, the full experience. And again, obviously, depending on your political beliefs, you’re gonna either be really happy, or you’re gonna be unhappy with what goes on. And amongst time, the reality behind it is that, again, there’s ways of investing and any kind of market condition, it’s just what you need to do is kind of set up an fn type of scenario. So if Trump is reelected, what impact will that have on the market? And how do you want to invest going forward? If Biden wins the election? What impact is that gonna have with the market? And how do you want to reposition your portfolio in order to take advantage of a new regime with new ideology? So it taking it to extremes that I’ve, you know, I’ve always found that that’s typically the wrong way of going about it. There’s always ways of being able to invest and find areas of strength within most markets. So it’s just really kind of sitting down, mapping out what’s going on being purposeful, trying to remove your emotions out of the equation as much as humanly possible, and attacking it from from that angle, rather than having a knee jerk reaction.
You know, if you remember Jeremy, back, when Trump was elected, again, it was a surprise to so many people, the markets dropped dramatically, and the aftermarkets and the futures were horrible. And I was actually back east
at a convention at that time, and had a couple clients expressed concern, and I was flying home,
back to California, from Florida and had to go through Texas, I was on a flight that left before the markets open and what my statement was to a few of these clients that really were very concerned, I’m going to cash and I’m like, No, you’re not going to cash like let’s talk when I land. In Texas, I’ll have, you know, an hour and a half layover, let’s talk, the markets were down eight 9% overnight, and by the time I landed in Texas, they were up. So the thing to keep in mind with all this is that there’s going to be a knee jerk reaction, most likely with this election, and the markets are gonna show some volatility. You can’t react to it. You’ve got to be proactive with how you’re dealing with it. And really, again, like we are doing it, try to approach your investments as with as much political, you know, being agnostic to politics as much as you possibly can. Removing that allows you to make wise decisions rather than the reactive to, to what’s going on within the profits markets.
Yeah, Jeff, that’s a great answer. And it’s certainly something that we should all keep in mind to not let short term events derail long term plans and strategies. So really appreciate your insights on on everything that you shared with us. And as always, Jeff, thank you so much for being on this podcast with us this morning. blew my voter. Have a great bedroom. Eva, and Jeff look forward to speaking with you next time. But until then everyone be safe, be healthy.
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