How to Invest in This Fraught Election Year

The first debate is over, and President Joe Biden’s faltering performance prompted much hand-wringing among Democrats. How likely is it that former President Donald Trump will win the November election?

As a citizen and as a voter, I care about this question. But as an investor, I’m indifferent — or at least I’m trying to be.

Fundamentally, the markets don’t care who wins. Stocks rose early Friday after a favorable inflation report only to give up a little ground later, while the odds of another Democrat replacing Biden jumped on PredictIt, an election prediction market. Even with this turmoil, financial markets seem utterly unruffled by political developments.

Momentous as this election may be, stocks did well under Trump and they are doing well under Biden — not necessarily because of any of their policies.

The harsh truth is that the market is amoral and largely apolitical. Most people have been better off financially if they disregarded politics entirely.

Staying in the Market

Consider three hypothetical investors with different views about politics and finance, in a study by Jeff DeMaso, editor of The Independent Vanguard Adviser, a newsletter focused on Vanguard funds.

Each investor started with $10,000 at the beginning of 1977. They were free to move their money between the Vanguard 500 stock index fund and the Vanguard Cash Reserves Federal Money Market fund.

One person held the Vanguard stock fund only when a Democrat was in the White House. Another trusted the stock fund only during Republican administrations. The third was apolitical in her investing life and held the Vanguard 500 fund at all times.

Here are the results for each portfolio from January 1977 through May 2024:

— The Democratic-only portfolio, $849,016.

— The Republican-only portfolio, $162,578.

— The utterly apolitical portfolio, $1.6 million.

Note that during that period, Democrats and Republicans held the presidency almost the same number of years: 24 for Republicans vs. 23.5 years (and counting for) Democrats. So someone who invested only during Republican presidencies had a slight time advantage.

But the market has done better under Democratic presidents than Republicans — not just since 1976 but all the way back to 1900.

Don’t make too much of that. There haven’t been enough presidencies to make a statistically valid conclusion. What is clear is that stocks prospered under both political parties, and that by staying in the market through 12 presidential terms, the apolitical investor benefited from the marvelous effects of compound returns with reinvested dividends in a generally rising market.

But remaining in the market isn’t always easy. Despite the market’s upward tendency, big declines happen with disturbing regularity, but at unpredictable times. It doesn’t seem to matter who the president is.

For example, from Oct. 13, 2007, until March 13, 2009, during the financial crisis spanning the Bush and Obama administrations, the S&P 500 lost about half its value. In February and March 2020, at the onset of the coronavirus pandemic in the last year of the Trump administration, the S&P 500 fund fell more than 30%. And in the nine months through September 2022, as the Federal Reserve raised interest rates to combat inflation in the Biden administration, the S&P 500 fund lost about 24%.

Sometimes, the S&P 500 ended up lower during a presidential administration than when it started. That happened in the Nixon, George W. Bush and Hoover administrations. Avoiding stocks during those entire presidencies would have been a good move, but then you would also have had to know when to get back into the market. Alas, no one knows in advance when the market will rise or fall, especially not the Wall Street gurus who make predictions every year.

And Yet ...

There are many other valid ways of investing in an election year. I don’t recommend them, but I follow them.

I’d place most of them under the rubric of market timing — investing jargon for buying and selling at opportune moments — a practice that can be immensely profitable for those capable of doing it reliably. Most people, including market professionals, can’t manage that feat consistently, however. I certainly can’t.

Even so, there’s an enormous cottage industry on Wall Street devoted to predicting whether the overall market, or particular sectors, will rise or fall.

Here’s a thumbnail summary of the current wisdom, such as it is. It’s based on the assumption that the two current candidates continue their campaigns.

The consensus is that as long as there’s no landslide victory for either party — so neither controls the White House and both houses of Congress — the markets will be fine.

Still, under those circumstances, if there’s a Trump victory: Expect more and higher tariffs, which could disrupt trade and be inflationary, and hurt “the consumer discretionary, industrials, and information technology sectors,” in the view of UBS, the financial services company. Trump would probably manage to lower taxes and increase the budget deficit, stimulating the economy but, again, goosing inflation — which could lead to higher interest rates. There is likely to be less regulation, with sectors like fossil-fuel energy and financial services benefiting.

If Biden is reelected but Democrats don’t control Congress, the status quo continues. Expect greater regulation (though the Supreme Court on Friday limited the executive branch’s regulatory powers) and higher taxes for wealthy people and companies than under Trump, along with executive orders aiding “companies within industrials, materials, and utilities focused on renewables and energy efficiency,” according to UBS.

A landslide giving control of both the White House and Congress for either party would be unexpected and could disrupt the markets. Biden might be able to achieve legislative feats that have been out of reach. The probability of tax increases on the rich and on corporations rises. The chance of positive outcomes for clean energy companies increases, while banks and fossil-fuel companies will have a tougher time, or so the Wall Street thinking goes.

A Caveat

“This time is different” is rarely true in investing. But every so often, things really are different.

My assumptions about the markets and investing are based on a central premise: that the legal, economic, social and political system that has prevailed until now will continue, with some evolution but without a major break, well into the future. Trump has promised to “undo foundations of American democracy and to rule as authoritarians in other countries have,” as my colleague David Leonhardt has written.

Hedging against that possibility isn’t merely a financial issue, of course. Holding some gold, which I don’t do now, might be wise if the foundations of American democracy are shaken. Holding stocks and bonds from other countries in low-cost index funds, which I always do to further diversify my portfolio, might be urgent in a U.S. crisis. Holding extra cash might be a smart move.

But, oddly, because the United States is so important globally, past crises here have shaken up foreign markets, too, and in times of trouble, where are you going to go for safety? Invariably, since World War II, it’s been the United States, strengthening U.S. Treasurys and the dollar, not weakening them.

Up to a point, that dynamic can be expected again. But only up to a point. I’m hoping we won’t find out where that point is.

So I’m not claiming that it makes no difference who wins. It matters a great deal. Vote, by all means.

But tune out politics when you turn to investing. You are likely to end up wealthier than if you base your financial decisions on political convictions.