Presidents change, markets remain

The U.S. President is often considered one of the world’s most powerful figures, wielding substantial influence over the world’s largest economy and one of its most formidable militaries, albeit limited by a system of checks and balances through Congress. Perhaps it is understandable that the media, politicians, celebrities and business owners alike wish to make their voices heard during campaign season… it’s a noisy time of year!

At the time of writing, Donald Trump has secured enough votes for a second term as U.S. President for the Republicans.

It has been a roller coaster, with President Biden’s withdrawal from the race, an assassination attempt, Elon Musk coming in to bat for Trump and Taylor Swift for Kamala Harris, the Democrat nominee and former Vice president with the usual fierce partisanship from both sides.

For investors, it is natural at times of political uncertainty to wonder whether they ought to act, perhaps altering their portfolio to position for a specific outcome, or to move money into cash deposits until things ‘settle down’. Some choose to invest this way, mostly at their peril, as very few managers possess the ability to consistently predict such events^[1].

A better strategy, as is adopted in your portfolio, is to outsource this guesswork to the market itself, relying on the millions of daily participants to come up with their expectations and reflect them in prices. Thankfully, given both Democrats and Republicans support Capitalism and believe in personal freedom and property rights, this strategy is a tried and tested approach to investing.

The chart below shows the Global equity market return over the last century or so, where the colours represent whether the sitting US president was Republican (red) or Democratic (blue) at the time. There is little to draw from the red and blue sections, both parties have resided over some fantastic periods, and some not so fantastic ones. However, the ability of Capitalism to create wealth despite the ups and downs is evident, with $1 invested in 1926 becoming nearly $10,000 by 2024.

Figure 1: Democratic (blue) and Republican (red) Presidents and equity market returns

Source: Dimensional Returns. Index: Albion World Stock Market Index^[2]. Date: 07/26-09/24. Returns in USD.

The challenge is that it is not enough to know what the outcome of this election will be, one also needs to know – without the benefit of hindsight – how the market will react once the event occurs. Although the initial reaction for a Trump Victory of developed world markets has been positive, we cannot know how they will react in days, months and years to come. Answering this question is akin to guesswork, despite what some of the financial press might have us believe.

Whilst guessing against randomness is impossible, taking on the known risk that equity returns are far less certain than holding cash rewards investors who ignore this short-term noise and focus on the long-term.  The choice of the US President is important to some, but to the long-term investor it is largely irrelevant.

If you have any questions, or want to discuss your individual circumstances with an Old Mill financial expert, please do get in touch by clicking here…

[1] Albion GAME^TM 24.5 – 90% of US equity fund managers were beaten by the MSCI USA IMI Index 20Y to Jun-24.

[2] https://smartersuccess.net/indices