Political party

“No political party had a substantial impact on long-term market returns,” says expert

Isabel Barrow, director of financial planning at Edelman Financial Engines, joins Yahoo Finance Live to explain why the stock market won’t matter no matter which party wins the midterm elections.

Video transcript

OK. Well, the midterm elections are about three weeks away. And Wall Street is waiting to see which party will control the House and Senate. Now, Edelman Financial Engines recently published a study on how markets operate based on the balance of power on Capitol Hill – we want to bring Isabel Barrow, director of financial planning at Edelman, here to break down that report. And Isabel, let’s take a look at some of these different scenarios here that you took — when you looked at this data. We know there will be a Democrat in the White House. So let’s start with, if Democrats are able to hang on in both the House and the Senate, what does that mean for the market?

ISABELLE BARROW: Well, overall, we know that politics is a very exciting subject. And it can cause people to act emotionally. We tend to get emotional about so many things when it comes to our money. It can be market volatility, inflation, world events. But ultimately, it’s best to keep your emotions about these political outcomes out of your investment decisions. So what we like to tell our customers is that money is green. It’s neither red nor blue.

So, in this study by Edelman Financial Engines, we looked at the performance of the S&P under different administrations and political parties from 1948 to the end of 2021. And we analyzed eight possible combinations of control that could have existed in the White House and in the two houses. of Congress during this period. And ultimately, what we found was that no political party had a substantial impact on long-term market returns.

And Isabel, what we hear repeatedly on this show and on every show is that the markets love a divided government. Do the numbers back it up?

ISABELLE BARROW: It’s true. You know, like I said no, political parties have had a huge impact on long-term market returns. So, for example, when the Democrats controlled all three areas, the S&P produced an average annual return of about 15.1%. Under the Republicans, it was around 15.9%, two returns well above the average return. If you had invested, however, $100,000 in 1947 and held it until 2021 only when part of it was in the Oval Office, the best return you would have had would be around $3.7 million. of dollars. So, from 1947 to 2021, $100,000 grew to $3.7 million. It’s not bad. But if you had stayed invested all that time, whatever party was in power, whatever mix of Democrat, Republican, Democrat in that graph that you show, you would have had over $31 million over that same period of time. So if you just focus on who’s in the White House, you know, you’re missing, in this case, what would have been about $27, 28 million over that time.

So Isabel, from an investor’s perspective, I guess, should people do something different with their portfolios or just keep it all the same?

ISABELLE BARROW: Well, at the end of the day, you know, what this study shows us is that economics drives markets over the long term. These are not elections. Politics is therefore only one of the thousands of things that have an impact on the economy. There are so many factors. It’s, you know, not just…and it’s not just the markets. It’s the Fed, geopolitical events, the market cycle, I mean pandemics.

So what we need to remember as investors is that it is best to stay neutral when it comes to our money when it comes to politics or market timing. So, at the end of the day, don’t let politics dictate your portfolio, because politics and investing don’t mix. You can change your investment strategy based on all the other issues in the economy that you know are helping to influence these decisions. But don’t let it be for one thing, like, just investment results.

So keep your eyes focused on your long-term goals. Keep fact separate from fiction when it comes to elections in your portfolio. And it’s essential to keep in mind that no outcome of this year’s midterm elections will hurt your wallet more than making that decision based solely on the emotion behind it instead of focus on your long-term plan. Remember the old adage “it’s time for the market, not to time the market”. And this also concerns politics.

But if you choose tax and regulatory policies, those things are definitely affected by the controlling party, right?

ISABELLE BARROW: Well – and so this is a bit of a separate conversation, I think, because what we’re talking about in this case is more about your personal financial situation – your personal economy, your own – you know, your own long – long-term goals and their impact on your financial plan. What I’m talking about and what this study is about is the impact of the political environment on the stock market. So yeah, if you’re talking about politics, politics can impact us in a lot of ways other than our investments. But if we focus on the market, that’s what this study showed – is that ultimately who’s in power isn’t what dictates those market returns.

Worry about green, not red, not blue. Isabel Barrow from Edelman… really appreciates this breakdown. Thanks.