Fisher Investments on the Many Problems With Partisan Investing

Editors’ Note: Fisher Investments favors no politician nor any political party, assessing developments solely for their potential market and economic impact.

As US midterm elections approach, brace yourself for another wave of campaigning—potentially even hotter than usual. Recent post-census redistricting left fewer swing districts, so there seems to be little reward for moderating. Politics has long colored how people think about economics and markets, but it seems to us today’s highly politicized environment makes partisan bias an even bigger problem for investors, with potential for severe and overlooked consequences. Political preferences are of course natural and important, but factoring them into portfolio decisions can lead investors astray from their goals, in Fisher Investments’ view.

In Fisher Investments’ experience, most investors lean Republican, seeing the party as pro-business and Democrats as anti. This notion is based largely on soundbites and campaign rhetoric, ignoring the reality that both parties have passed legislation that helped and hurt markets. For instance, the Sarbanes-Oxley act of 2002—bipartisan legislation passed under Republican President George W. Bush—wasn’t terribly market friendly, as the intervening 20 years have shown. Democratic President John F. Kennedy’s fight against steel prices in the early 1960s shows a similar trend. Both presidents also cut taxes, ostensibly a pro-business move. On the flipside, Fisher Investments finds investors who lean Democratic tend to see Democratic administrations as better for the economy, perceiving pledges for higher public spending and investment as fiscal stimulus. But here, too, both parties have raised and cut spending over the years, with the economic effect mostly indeterminate.

No party is inherently better or worse for stocks—bull and bear markets have occurred under both Democratic and Republican leadership. Despite each party’s respective marketing message, there is no strong evidence that markets favor either. Campaign rhetoric is just that—rhetoric. Politicians often make promises on the campaign trail that go unfulfilled when they actually hold office, so it is important to understand this and look past it when investing. Assess not what they say they will do—but what they can likely accomplish based on both their political capital and the balance of power in Congress.

Investors may not consciously believe their preferred party’s policies are best for the economy, while their opposition’s are worst. But these biases can play into their view of the economy, which can in turn affect their investment outlook and decisions. The University of Michigan’s Consumer Sentiment survey does a good job displaying this. While the survey hasn’t regularly asked this question for all that long, a look at the last six years still shows it.

Exhibit 1: University of Michigan’s Consumer Sentiment Survey: Index of Consumer Sentiment

Source: University of Michigan Consumer Sentiment Survey, Index of Consumer Sentiment and Components by Political Party, as of 6/13/2022.

When a Republican held office, respondents who identified as Republican had rosier views of the economy than Democrats or independents. Overlooking most market forces, they have a brighter outlook on both current and future economic conditions.
The opposite holds true, too—when Democrats hold office, Democratic respondents have a more upbeat outlook.
When the party in power flips, so does their economic view—a purely partisan mindset that can lead to major mistakes. Investors who oppose new leadership may sell just before a strong rally, while supporters might overlook worsening fundamentals and buy into an unhealthy market.

Looking objectively at market returns and economic data, Fisher Investments finds conditions do not change materially when Americans elect a new president. In our view, the timing of a president’s term—and what that means for their ability to enact legislation, as well as how the probability of big legislation squares with investors’ expectations—is more important for returns. Exhibit 2 shows yearly American stock returns since 1925, organized by individual years of each presidency.

Exhibit 2: The Presidential Term Anomaly: Annual S&P 500 Returns 1925-2020

Source: Global Financial Data, as of 3/8/2022. S&P 500 annual total returns, 1925 – 2021.

Fisher Investments thinks stocks are politically agnostic—they focus on the probability of sweeping legislation, and the timing of a president’s term is central to the likelihood big changes pass. In our experience, even well-intended legislation can create winners and losers, whether by altering property rights, disrupting business models with regulatory overhauls, or otherwise discouraging investment.

Accordingly, as Exhibit 2 showed, returns are typically weaker in year one and early year two as new administrations tend to have more political capital and stronger majorities in Congress early on. Weakness will often escalate in the lead up to midterms (as we have seen this year), as extra-loud campaigning stokes fear and uncertainty.

Yet as markets gradually realize the elections will raise political gridlock, stocks tend to thrive as uncertainty and the likelihood of radical bills passing falls. These tailwinds often last into the final year of a president’s term as it becomes clear that whatever bills do pass are more moderate, watered down versions of their original proposals. With a lower likelihood of sweeping legislation, stocks climb the wall of worry constructed during midterm campaigning.

In Fisher Investments’ view, investors should think as markets do. Not seeing politicians as “good” or “bad,” but rather weighing which legislative outcomes are most probable. Remaining disciplined amid noisy politics is no easy task, but we believe it is essential in avoiding costly mistakes and reaching your long-term investing goals.

Investing in stock markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance is no guarantee of future returns. International currency fluctuations may result in a higher or lower investment return. This document constitutes the general views of Fisher Investments and should not be regarded as personalized investment or tax advice or as a representation of its performance or that of its clients. No assurances are made that Fisher Investments will continue to hold these views, which may change at any time based on new information, analysis or reconsideration. In addition, no assurances are made regarding the accuracy of any forecast made herein. Not all past forecasts have been, nor future forecasts will be, as accurate as any contained herein.

“The Partisan Economy,” Richard Curtin, University of Michigan, 1/12/2022.


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