Even though election day was several weeks ago, there’s still a talking head throwing sound bites at you about the presidential race on nearly every news channel you turn to. Politics can be exhausting regardless of your political affiliation, and the uncertainty surrounding both our political and economic environment can make investors uneasy. Just like our investment philosophy, we believe facts and data always beat guessing games on what the future holds, and here’s the good news for investors: for the U.S. economy, historical data shows that the country will be alright regardless of which party is in control of the White House, as long as there are different parties controlling the branches of Congress.
While it may go against what we tend to believe, history shows that Wall Street likes a divided government. Historically, The S&P 500 shows us that stocks returned 17.2 percent on average when Congress is split, according to LPL Financial1. Annual stock returns drop to 13.4 percent when Republicans are in control of Congress and drop to 10.7 percent when Democrats have full power. Additionally, some of the best stock market years have occurred under a divided government — in 1985, 2013, and 2019 the stock market gained more than 30 percent — all years in which congressional control was split between Republicans and Democrats2.
The yin and yang of a split government means that both parties’ radical leanings won’t enter the policy sphere. So, if you were afraid of an extreme tax hike or hoping for a huge tax break, then odds are, with a split Congress, you won’t get either. Plus, the stock market doesn’t like surprises, and a split government is less likely to send shock waves through the economy. These extreme policy changes simply won’t happen without both houses coming to an agreement.
While Georgia’s Senate seats are still up for grabs, a split Congress is still possible even if each party secures a seat. We can’t predict the future, but historical data can indicate what direction we are heading, and a split Congress is very likely, and a healthy stock market could likely follow.
Democrats and Republicans do have some common ground, and compromises can be reached. The new government could mean increased spending on infrastructure, intellectual property protections, and regulation of big tech companies. A split government will mean that no one party’s agenda will monopolize the next four years, and maybe extreme polarization will be kept in check.
When looking at sectors and the recent performance, the two top-performing industries in the last two presidencies have been technology and consumer discretionary, with the bottom two being energy and financials3. Regardless of the political affiliation of leadership and what it means for the stock market, our core principles at Beacon haven’t changed. A solid asset allocation is still our best practice. Our research and fundamentals are committed to a diversified portfolio in all types of markets and governments. We bring value by staying steadfast to our methodology.
So, what does this mean for your clients? With so much conflicting information on the news and social media, reassure your clients with facts and data. Don’t let your clients be sidetracked by all the noise and keep them committed to their goals.
Although this year is abnormal for all of us, we are still optimistic about the financial future and what a divided government can mean for the country and the stock market.
For additional ideas or recommendations on timely client conversations, feel free to contact your wholesaler or visit our Advisor Toolbox for a number of great resources.