Ken Fisher: ‘Bad Politicians Don’t Mean Bear Markets’

Editors' Note: Our discussion of politics is focused purely on potential market impact and is designed to be nonpartisan. Stocks don't favor any party, and partisan ideology invites bias-dangerous in investing.

It is the first Tuesday after the first Monday in November, and precisely 53 weeks from today American voters will head to the polls to select their country's next president. And with that in mind, we offer this pearl from our boss, Fisher Investments CEO and founder, Ken Fisher:

"...Presidents, whatever their stripes, tend not to make or break stock markets."

- Ken Fisher, Forbes, September 26, 1994.

Take this as a reminder: Basing investment decisions on ideology and partisan politics is a path to financial ruin. Neither party is inherently better or worse for stocks, and thinking otherwise is to act on bias. Instead, one must look at the totality of elections and assess what policies are likely to become law. Today, it's vastly too early to do this for 2016's election.

As for the quote, yes, you are seeing that date correctly. 1994, of course, was a midterm election year, not a presidential one. But still, many right-leaning investors feared Bill Clinton's impact on stocks, particularly after the ferocious debate involving Clinton's plan for nationalized Health Care. The article, however, makes the simple-yet-profound point that folks routinely fear the economic and market impact of politicians they oppose, despite the fact that, as Ken often notes, "Bad politicians do not mean bear markets." (This is not to say we think Clinton was bad, we are talking about a common perception at the time. But then again, politicians are rarely good.)

That is a mantra we think many-of either party!-should embrace today, 12 months before voting. Maybe you think Donald Trump is a chump. Or Hillary Clinton is a robot sent from outer space. Maybe Bernie Sanders' off-key folk singing risks America's eardrums, or Ted Cruz's reading of "Green Eggs and Ham" would scare most children. Maybe you are upset that Lincoln Chaffee's dropping his bid means his plans to take the country onto the metric system won't come to fruition. Whatever your ideology leads you to believe, we can't overstate the importance of setting it aside when analyzing markets.

Right now, already, many fret the potential impact of various candidates' policies, but it is far too soon. We're still in what journalists call, "the silly season." Campaigning has yet to even begin in earnest, but nevertheless, coverage is near nonstop. At this point in 2008, John McCain-the eventual Republican candidate-was polling third in the primaries. On the Democratic side, Hillary Clinton was in first. She didn't finish there. You can't be assured the politicians leading today will be in the general election, much less be able to enact their campaign promises.^[i]

So why the warning now? Because while politics are an endless source of amusement and personality, getting caught up in them is a trap for investors. Already, there are a slew of studies out assessing this or that party's impact on the economy, itself vastly overstated. Too often, investors try to divine what politicians are really up to and exactly how they are lying to voters. Take it for granted, they are lying to you,^[ii] but at this juncture, the best you can really do is analyze election structure and prepare for common sentiment features in election years.

Again, it's very early, but 2016's election structure favors the Republicans retaining control of Congress. In the House, their sizable majority is an advantage as voters tend to reelect incumbents.^[iii] Republicans are more vulnerable in the Senate, but it will take a Democratic landslide to wrest control-unlikely. That means if a Democrat wins, gridlock is the likely outcome, a bullish factor suggesting an active legislature causing major changes to property rights isn't likely.

However, if a Republican wins, it likely means the Republicans would have uniform control over government and the ability to ram through legislation. In our experience, the American investing public has a tendency to lean Republican, so this could elevate expectations. Republican candidates also typically campaign using business-friendly platforms and language. Only when they are in office are those promises proven to be merely times a politician's lips were moving^[iv], disappointing those who voted for a pro-business candidate and often dampening returns in the inaugural year. Conversely, Democrats often campaign using more populist rhetoric, so right-leaning investors often fear their election will cause problems for stocks. In the election year, this dampens sentiment and, hence, returns. But when elected, reality typically undershoots those fears, and the relief sends stocks skyward. (Exhibit 1)

Exhibit 9: The Perverse Inverse

Source: Global Financial Data and FactSet, as of 1/7/2015. S&P 500 Total Returns, 1926 - 2014.

Hence, the riskiest proposition for stocks is a major win by a Republican candidate that swells sentiment, only to disappoint in 2017. It is a factor worth watching when the campaign gets serious, but for now, enjoy the silly season.