Politics, Government Spending, Taxes, Debt

Politics, Government Spending, Taxes, Debt

We need to talk about politics and the stock market.  With those few words, I have likely increased your heart rate and stirred some emotions.  There is a fear that our politicians will destroy our market returns, fear that they will send us into another recession with the political fighting, government spending, increasing taxes, or the never-ending increases to our national debt. People in this nation have a genuine concern that politics will impact the stock markets.

Is that possible?  Sure it is.  Prices in the stock markets are based partly on emotions and people’s expectations of future events and the impact of those events on the stocks/companies in which they invest.  Let’s think back to February/March 2020 (again, I have your heart racing).  A new virus has started making the global rounds, and politicians began closing down economies worldwide.  People reacted because now they were unsure if their investments in XYZ company were safe and if that company would survive the shutdowns. As a result, an abundance of stocks was sold in March of 2020. 

Going back a little further, in October of 2016, the US was in the final stages of a very emotional political presidential election.  Nobody knew how a Hillary Clinton presidency or Donald Trump presidency would operate. So, society became inundated with firm opinions and passions. As a result, in October 2016, the S&P 500 fell for nine consecutive trading days, making it the longest losing streak since 1980.

Again, stock market prices reflect future return expectations, and those expectations are generated by flawed human beings susceptible to their emotions (myself included).  When we have political events that elicit strong feelings, we are very likely to see near-term reactions.  With most political actions that impact the market, we see near-term reactions that become a small divot in time.

Instead of asking the question, “Do politics affect the market?” Instead, I would suggest asking, “Do market reactions to politics matter?”  And to this, I would answer, “No, if you have a good plan in place.”

The good news is that stock market prices reflect future return expectations, and millions of investors generate those expectations with varying time horizons.  Yes, this is a repeat of a statement before, but here is why this statement is so important.  These variable time horizons essentially make politics a non-factor when you have a good plan because inevitably, younger investors are joining the global marketplace each year with the expectation that over their 20-30+ years of accumulation and investing, the stock market will go up.

With a strategic strategy, your advisory team knows your time horizon and your anticipated financial needs at any given point.  Your personalized plan should withstand COVID-19, 2016/2020 (really any presidential elections), tax increases (like the additional Medicare surcharge tax), mid-term elections, increased defense spending for conflicts worldwide, Brexits, auto, and bank bailouts, and so many more.  Our politicians will surely make the investment experience a bumpy road but let’s not give them the power to impact our investment decisions. 

Amanda Howerton, CFP®, CDMA® is a Senior Adviser with Rather & Kittrell.  Amanda is available at [email protected].