🦅 Politics and your portfolio

Hey hey, happy Monday!

Today, I’m answering one of the toughest — and most popular — questions of the year: how much will the political climate impact my finances?

Not much. But in some situations, a lot. It’s always a complicated answer, isn’t it?

BTW, I promise you there’s no partisan talk in this newsletter. Facts only. You can exhale now.

Have a friend who’s stressing about the election? Send ‘em my way 😊

In case you haven’t heard, there’s an election coming up in November.

Of course you know. You’re probably sick of it already.

If your media diet is like mine, you’ve probably been inundated the constant notifications and breaking headlines. Don’t even get me started on the mailbox spam.

Election season can be a lot. Nobody knows what’s going on, yet everybody seems to have a strong opinion about it.

I’ll give you a break from the partisan nonsense. I’m not here to talk politics. In fact, I am here to convince you to stop talking about politics, at least when it comes to your investments.

A common question I get these days is how the election could change markets and the economy.

My answer? Not as satisfying as you might think.

Politics don’t matter for your portfolio if you’re one of many people investing to build wealth over a long period of time.

If somebody tells you otherwise, they’re spinning a tale.

The data is clear: market crashes and economic crises have happened during Democratic and Republican administrations. 

Every president since 1900 with the exception of three – Lyndon B. Johnson, Bill Clinton and Joe Biden – has been in the Oval Office during a recession.

Over that same period, every president but one – George HW Bush – has been in power during a bear market (or a market crash of 20% or more).

By the way, this isn’t a comment on any particular administration. No president — Democrat or Republican — has enough pull to single-handedly control the $57 trillion stock market. In fact, I can’t think of many people who can single-handedly move markets over long stretches. Maybe a Fed chair if they go ballistic with the interest rate lever, I don’t know.

Over time, the stock market’s strongest threads have been the economy and earnings, not who’s in the Oval Office. Your political views are best saved for awkward conversations with your uncle, not your life savings.

Any self-respecting analyst on Wall Street will tell you not to freak out about the election.

I’ll throw a bone to the tale-spinners, though.

Politics don’t matter in investing.

But policy does.

This is where Congress comes in.

Congress’ party lines can make or break the likelihood of new policy passing. Sometimes, Congress is dominated by one party (or unified), and other times it’s split: one party controlling the House and another controlling the Senate. Theoretically, a split Congress may have more difficulty passing bills into law than a Congress dominated by one party.

I’m not a political analyst, so I can’t get into polls or predictions. But what I can tell you is that historically, the market has slightly preferred a split Congress. Since 1950, the S&P 500 has returned an average of 22% in a two-year term of a split Congress, versus an average of 14% in a unified Congress.

It makes sense, too. More dialogue, more disagreements, fewer new mandates for everybody to worry about.

No matter who wins in November, we’ll ultimately have to process some degree of change. And while that change may not derail your financial goals, you may have to deal with the effects of evolving policy in your portfolio and wallet.

Take taxes, for example.

Tax policy affects all of us, from the biggest, multinational companies to you and me.

Right now, there’s a spotlight on the Tax Cuts and Jobs Act, which is set to partially expire at the end of 2025.

The biggest variable for US companies could be the corporate tax rate, which was reduced from 35%  to 21% under the TCJA. The TCJA also included business-friendly provisions on capital spending tax treatments and pass-through income.

Certain industries – like retailers and manufacturers – are more tax-sensitive, so they could struggle if parts of the TCJA expire. And when profit margins and cost-cutting are in vogue, tax burdens could make a big difference.

There are also a slew of individual tax treatments and credits that are up for negotiation, and any changes could impact your portfolio and your wallet. And to that end, both candidates have talked about plans for new tax credits and cuts for Americans. 

You might want to study up on tax policy. Or talk an expert. I know a few.

Policies don’t define an entire economy, but they can have far-reaching effects on your own financial situation.

Politics, on the other hand, can be a dangerous distraction if you let your focus slide.

Booms and busts will happen regardless of who’s in office.

Prepare accordingly.

Thanks for reading!

Callie

Like what you just read? Share it with a friend, pretty please 😊