The big day is nearly here. Tomorrow, Americans across our great country will head to their local voting booths or get one final chance to mail in their ballots to determine who'll lead the United States in the years to come. At stake are all 435 seats in the House of Representatives, a third of all Senate seats, and the big chair in the Oval Office.
While local elections will obviously have differing levels of importance to the American populace, the two most closely watched races are for the U.S. Senate, where Republicans currently hold a relatively small majority, and the White House, where Democratic Party challenger and former Vice President Joe Biden will look to unseat incumbent Republican Donald Trump.
Election jitters hit Wall Street
For roughly the past six months, Wall Street has been dissecting what a Biden or Trump win would mean for the U.S. economy and stock market. Keep in mind, though, that equities and the economy aren't tied at the hip and do move in opposite directions, on occasion.
Many pundits believe that a Biden win would bring more day-to-day stability and transparency to fiscal policy, but would come at the expenses of corporate profits. That's because Biden's tax plan, which aims to make 12 major changes to the U.S. tax code, would increase the peak corporate marginal tax rate to 28% from 21%. Trump's flagship Tax Cuts and Jobs Act is what slashed the corporate tax rate from 35% to 21%. If Biden were to get his tax plan through Congress, Wall Street expects corporate earnings would fall by around 10%.
Comparatively, another four years of Donald Trump would be met with fiscal uncertainty, but probably cheering from corporations. Even if Democrats were to sweep both houses of Congress, it wouldn't be enough to sway Trump to increase peak corporate tax rates.
It's this uncertainty of what'll happen on Election Day that has the market jittery.
The Election Day chart investors need to see
But I have a cure that'll make investors far less nervous about the outcome. Take a gander at this chart of the benchmark S&P 500 (^GSPC 0.07%) since the beginning of 1950:
Notice something? The broad-based S&P 500 tends to move higher far more often than it moves lower, with bull markets substantially outlasting periods of recession. Even though recessions are far more common than you might realize, the expansion of corporate operating earnings over time, regardless of who's been president, has pushed equity valuations higher.
Furthermore, since April 1945, the vast majority of presidents have overseen a bull market expansion (figures in parentheses denote a decline):
- Harry Truman (1945-1953), Democrat: S&P 500 return +87%
- Dwight Eisenhower (1953-1961), Republican: +129%
- John F. Kennedy (1961-1963), Democrat: +16%
- Lyndon Johnson (1963-1969), Democrat: +46%
- Richard Nixon (1969-1974), Republican: (20%)
- Gerald Ford (1974-1977), Republican: +26%
- Jimmy Carter (1977-1981), Democrat: +28%
- Ronald Reagan (1981-1989), Republican: +117%
- George H.W. Bush (1989-1993), Republican: +51%
- Bill Clinton (1993-2001), Democrat: +210%
- George W. Bush (2001-2009), Republican: (40%)
- Barack Obama (2009-2017), Democrat: +182%
- Donald Trump (2017-current), Republican: +48%
Though the annualized return of 10.6% for Democrats over the past 75 years and six months, pardon the pun, trumps the 4.8% annualized return for Republicans, the fact is that the stock market tends to do well over long periods of time no matter which party is holding the reins.
Stick to your game plan, no matter what happens on Nov. 3
The point is this: No matter who the White House tomorrow, life will go on in the corporate world. Investors will continue to be rewarded for their willingness to buy innovative and/or time-tested companies, and they'll be paid handsomely for hanging onto their winners over the long term.
In other words, you should stick to your investing game plan and not change a thing.
What you can consider doing is taking advantage of the unprecedented volatility we've witnessed this year, which may well follow the election. If the S&P 500 were to head lower, we concretely know from the chart above that, eventually, crashes and corrections are put into the rearview mirror by bull market rallies. This is to say that every notable move lower in the stock market since record-keeping began has proved to be a buying opportunity, as long as you have a long-term mindset.
Investors can also use the election as an opportunity to review their portfolio holdings. This doesn't mean sell your oil stocks if Biden wins, or cash in your chips on your solar stocks if Trump proves victorious. Rather, analyze whether your initial investment thesis in every company you own still holds water. If the reason(s) you took a stake in a publicly traded company is still valid, then it shouldn't matter whether Joe Biden or Donald Trump leads the nation over the next four years.
Keeping politics out of your pocketbook when it comes to investing is usually a prudent course of action.