ELECTION 2024 - THIS IS IT. THE END OF EVERYTHING!
In conversations with many investors and potential investors this year, close to 100% of them have voiced concerns that democracy, freedom and civility, as we currently recognize them, are at risk of vanishing. Half of them believe this will be the result of a Harris victory and the other half believe it will result from a Trump victory.
While the current political environment is one of the most bitterly partisan in history, this refrain is not at all new or unprecedented.
Bitter partisanship dates to the 1800s:
• In 1803, VP Aaron Burr (Democratic-Republican party) challenged the first Treasury Secretary, Alexander Hamilton (Federalist party), to a duel and killed him.
• In 1860, Abraham Lincoln of the fledgling Republican party won only 40% of the popular vote, but most of the electoral votes in the North, along with California and Oregon. South Carolina voted to secede along with six more Southern states, forming the Confederate States of America in February 1861.
• “Dewey defeats Truman.” In 1948, it seemed clear that Harry Truman (Democrat) was on his way out. In the 1946 mid-terms, both houses of Congress went Republican for the first time in 20 years and polls showed only 1 in 3 Americans approved of Truman. He beat Dewey (Republican) in one the biggest political upsets in history.
“This Is It. The End Of Everything”
~H.L. Mencken, the “Sage of Baltimore,” on the Morning of November 3, 1948, reacting to the election of Harry Truman.
Truman’s defeat of Dewey – the greatest upset in the history of American politics, bar none, was not the end of everything. In fact, it was not the end of anything!
But if you'd bet your investment portfolio that it was the end—and gotten out of the equity market—you missed about a 50% upswing between Election Day 1948 and the day President Eisenhower was inaugurated in January 1952.
You read that right: in those four tumultuous years—during which the Soviet Union got the atomic bomb, America entered into a land war in Korea, and our country was torn apart by investigations into communist subversion—the broad equity market went up by about half. And that doesn't even include dividends, which were very substantial: in those days, mainstream equities yielded north of 5%. With full reinvestment of dividends, the forerunner of the S&P 500-Stock Index compounded at an annual rate of 20% between November 1948 and January 1952. (Source: “The S & P 500 at your fingertips”).
The lesson: When you start making investment policy out of your personal dread of (or revulsion at) a political outcome you don't like, all kinds of very bad things can start happening to you.
FINANCIAL MARKET BEHAVIOR AND ELECTIONS – A BRIEF HISTORY
Reacting to one’s perception of election risk by reflecting one’s thoughts/fears/political preferences in determining portfolio strategy will likely result in a financial error from which one’s wealth and even retirement will likely never recover.
What does our long and rich history suggest? There have been 22 election years since 1936. All but two of them (2016 and 2020) now have prospective 10-year market return histories. A Democrat won 12 times and a Republican won 10 times. According to Thomson Investment View, 19 of the 20 election years with 10-year prospective market return data periods yielded positive results for the S & P 500. The one period that did not was virtually unchanged and began in 2000 with the election of “Dubya.” The decade with the highest return was 1988-1997 when George H.W. Bush was elected and $10,000 grew five-fold (annualizing at about 18%) to over $52,000. In sum, of all the 10-year periods beginning with an election year, returns were positive 95% of the time. The average annual return during the democratic regimes was 10.7% while the average during Republican regimes was 10.5%.
In researching the modern period for the S & P 500, Liz Ann Sonders of Schwab found that, beginning in 1961, making an initial $10k investment only when a Republican was in the White House resulted in an investment portfolio that grew to $102k by 2023. Conversely, making an initial $10k investment only when a Democrat was in the White House resulted in a portfolio that grew to $500k by 2023. However, the same $10k initially invested in 1961 would have grown to more than $5.1 million by JUST STAYING INVESTED from 1961-2023.
“If You Had Been A Staunch Democrat Or Staunch Republican Over the Past 8 Decades, You Would Have Missed A Lot Of The Party. You Do Not Want To Have A Political View In Investing!”
~Warren Buffet
KEY TAKEAWAYS
• Investors should not marry politics to their investment strategy. Those who have historically remained invested for the entire period regardless of which party was in office earned 10 times the return of those who only invested during Democratic presidencies and 50 times the returns of those who only invested during Republican presidencies.
• Altering one’s portfolio in response to perceived or actual political outcomes has historically been a very costly strategy.
• Fusion’s golden rules ALWAYS apply (especially in the well-documented case of political reactions):
1. All successful investing is goal-focused and planning driven, such that all successful investors are continuously (ALWAYS) acting on a plan.
2. All failed investing is market focused and current events/performance driven, such that all failed investors are continually (episodically) reacting to current events, the markets and short-term performance statistics.
“All My Life I've Heard Half The Country Say That If The Other Side Wins, Things Are Going To Hell."
~Warren Buffet
Wishing everyone and their families a happy, healthy Fall season!
Jonathan Blau