Q: Should my investment strategy change now that Donald Trump has been elected president?
After the raucous and anxiety-provoking election we've just experienced, many investors are no doubt wondering whether they should change up their investment approach now that we have a new president. In my view, the election of a new U.S. president always creates a good opportunity to reflect on your investment strategy. Toward that end, here a few thoughts to consider.
First, difficult as it may be, you must try hard to separate your political viewpoint from the economic reality that currently exists. As investors, we very much would like our political beliefs to dovetail with our economic outlook. It makes for a neat package. If your candidate won, you are prone to believe better days lie ahead for the economy, and vice versa. However, in my experience, the U.S. president really has a limited ability to impact the economy over the short term. Our economy is enormous, dynamic and currently growing at a slow but steady gait. Any policy changes or new legislation would likely take years to be felt and registered in the economy.
One particularly bright spot is the jobs market which has been consistently improving over at least the past five years. According to the U.S. Bureau of Labor Statistics, more than 144 million Americans are working which is about 6 million more than before the great recession of 2007-09. More folks working means more folks spending. And remember, consumer spending accounts for approximately 70 percent of the total U.S. economy.
You should positively use the election to rethink your investment strategy to ensure that your time horizon and tolerance for market risk are in line with your current mix of investments. However, if these factors haven't changed, remember that as investors we should be concerned principally with profits, not politics. And currently, in my opinion, the outlook for improved profits is bright.
Q: Have Republican or Democratic administrations been better for stock investors?
The statistics on stock returns during a Republican presidential administration versus a Democratic controlled White House are actually quite compelling, if not widely reported. Surprisingly, even though the Republican Party is known as business friendly, the U.S. stock market has outperformed during Democratic administrations. This performance differential is substantial and consistent.
Princeton University economists Alan Blinder and Mark Watson studied a range of economic data in exploring how the U.S. economy fared during various administrations since 1946. They found, for example, the economy grew by 4.35 percent during Democratic presidencies versus 2.54 percent in Republican. This corresponded with stronger growth in employment, corporate profits and industrial production for Democratic presidents. Most importantly for investors, stock market returns for the S&P 500 averaged 8.1 percent for Democratic versus 2.7 percent for Republican presidencies. What gives? Blinder and Watson are quick to point out that the reasons for the Democratic advantage are not entirely explainable. Certainly the luck of timing comes into play as each president inherits an economy not of their making. One curious finding is that consumer expectations seem to be more optimistic during Democratic reigns and as noted above, consumer spending is a vital component of the U.S. economy, accounting for almost 70 percent of economic growth.
It is also important to note that statistically speaking, these observations may simply be random, since there have only been 16 presidential terms since World War II. Given the inconclusive interpretation of data regarding political parties and economic growth, it would likely prove fruitless to construct an investment strategy solely around which party is in the White House. A far wiser strategy would be one that looks beyond the political environment of the day and focuses on economic fundamentals.
Jonathan Lokken, CIMA is managing principal of Lokken Investment Group LLC in Lewes. To submit a question for consideration in the next Q&A column, email firstname.lastname@example.org.
Disclaimer: The foregoing content reflects the opinions of Lokken Investment Group LLC and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Past performance is not a guarantee of future results. All investing involves risk. Asset allocation and diversification does not ensure a profit or protect against a loss.