The recent attacks on the United States Capital were stunning to watch. The divide in opinions, and political beliefs, has been growing wider in our nation for some time. But, the radical step of storming our government building was a step further than most Americans can understand or accept. What it did provide was clarity that a new government transition would begin, and talk of a continued Trump administration faded.
Concerned investors have been wondering if now is the time to be out of the markets. Certainly, this type of turmoil could be damaging to the economy and the investment markets, right? Well, it does not appear that way, and history (while no perfect comparisons to these strange events exist) has also proven otherwise.
The markets look for guidance. They need to know what the framework is that they will operate under. When things are unclear, markets tend to be volatile. You may not like the outcome of the election, but it is settled and known, and the markets typically enjoy that certainty. The markets do not even completely suggest they desire a political outcome. Markets have succeeded during periods of Democrat control, Republican control and during divided government.
In the months leading up to the election, and the weeks that have followed, many have questioned what impact the election results, and possible changes to tax policy, will have on their investments and financial outcomes. On a personal level, most of us assume that if "our candidate", or "our party", or "our belief on taxes" is not chosen, then the markets will behave badly. That might make sense in our heads, but history has suggested otherwise. Below are two charts that show that the economy and the markets have both had success regardless of party control. The top chart shows how the S&P 500 index has performed with the variety of party control. At first glance, you can tell the markets win more than they lose. Then, just looking at the colors of the bars, do the "reds" when more than the "blues"? How did they "grays" perform? There are some differences, but there is success in all political party control.
But, what about the economy? The bottom chart shows how the Gross Domestic Product (GPD), the measurement of the United States economy, has performed under those same political control changes. Again, it does not suggest any clear winner when you look simply at the color of the bars. I conclude that both parties have a pretty compelling case of success handling the economy. That may collide with your or my political views, but the data doesn't have emotions like we do.
You may be thinking, "fine, the political change may not kill the stock market but any tax increase will". The chart below, which again doesn't "have a dog in this fight" shows that the S&P 500 has had a great success rate even when tax rates increase. The red bars represent the performance of the markets in years where there has been some form of tax hike (e.g. personal income, corporate, or capital gains).
I love America and think democracy, even when it has blemishes, is unmatched in its freedom and opportunity. This may not be the prettiest time for America, but freedom is not always easy. We may not like the outcomes of freedom and democracy, but it has served us well since the forming of our nation. It is certain that the markets will go up-and-down, as they always have, but there is nothing that suggests opportunities to prosper are gone because of this election, and the turmoil that has resulted.
Stay grounded by your financial plan, and the investment strategy that is built in lockstep with your goals. Focus on "your market" not "the market". That means don't judge the success of your investments and plan by the swings of the overall markets. You likely aren't invested that way. Stay vigilant in paying your fair share of taxes, but no more. Building a tax-diversified investment strategy, and tax-efficient distributions plans will help thwart the impact of higher tax rates.
Want to know more about how to build a plan that stands the test of time, and the changes that are likely to come? Let's talk. Until then, remain well, love and care for your neighbor, and remain thankful for your freedom.