Be wary of betting your finances on political promises

On Nov. 6, the day after Election Day, the Dow Jones Industrial Average jumped more than 1,500 points (3.6%), the S&P 500 gained 2.5% and the NASDAQ 3%.

By the end of that week, the three benchmarks had increased between 4.6% and 5.7%, literally the best week of the year for U.S. equities.

Stock fluctuations are never due to just one reason. Financial markets are complex instruments intended to aggregate and value thousands of variables instantaneously. But there’s no doubt that the election heavily influenced the latest boom in stock prices.

The “Trump trade” is real, but it’s still up for debate whether or not it will be profitable.

No shortage of financial podcasts and newspaper columns have cautioned investors not to make investment decisions based on party preference or political outlooks. You hear it repeated every election cycle because it’s historically accurate.

The president simply doesn’t have as much influence on market performance as many people believe. Only three presidents since 1900 have avoided a recession while in office (Lyndon Johnson, Bill Clinton and Joe Biden). Only one president, George H.W. Bush, has avoided a bear market (a decrease of 20% or more).

But isn’t it significant that Trump will have more political power given the “red wave” on Election Day, meaning Republicans will have control of the White House, the Senate and the House of Representatives for at least two years? Not necessarily.

History tells us the stock market actually prefers a divided Congress. Since 1950, the S&P 500 has increased an average of 22% in two-year terms when we had a divided Congress, compared to returns of 14% when both the Senate and House were under the control of one party. It’s a reminder that financial markets generally desire stability instead of change.

Plenty of investors obviously think the election results will be good for certain market sectors and bad for others. The S&P regional banking sector soared 13% in the first four trading days after Nov. 5. International equities have sold off, on the other hand, based on expectations that increased tariffs will be bad for foreign profits.

It makes sense. But will it make you money? It might be just as likely that tariffs, which increase the price of foreign goods for U.S. consumers, will reignite inflation. Or Trump and his political allies will view tariffs more as a negotiating tactic with foreign leaders than as inevitable policy.

J.P. Morgan recently published some data citing the difficulty of investing based on expected political policies. In 2016, Trump campaigned on supporting traditional domestic energy industries (oil, coal and natural gas). Yet the S&P Energy index was down 40% during his term, while the Global Clean Energy index returned 275%.

In 2020, Biden campaigned on scaling back fossil fuels and galvanizing renewables. Since he’s been in the Oval Office, the S&P Energy index has more than doubled, while the Clean Energy index is down roughly 50%.

Part of the challenge is forecasting which political issues will become the biggest priorities of any new administration. There is a difference between campaigning and governing. No president accomplishes everything on his or her wish list.

Ironically, one of the most likely consequences of the election that will matter to investors could actually result in keeping the status quo. With Republicans in control, it’s a strong bet the Tax Cuts and Jobs Act, originally passed during Trump’s first term in 2017, will extend. Doing so would prevent income tax brackets from increasing for either families or corporations beginning in 2026.

The U.S. economic outlook looks strong, interest rates are coming down, and the stock market is likely to trend higher during the next four years. But it is a dangerous game to make portfolio decisions based on political promises.

Ben Marks is chief investment officer at Marks Group Wealth Management in Minnetonka. He can be reached at ben.marks@marksgroup.com. Brett Angel is a senior wealth adviser at the firm.