Many people get worked up when it comes to politics. Is it worth it? We have a tendency to think our side is in the right and the other side is sending us to "hell in a hand basket." This month's newsletter discusses this issue as it relates to your money and specifically, your investments. The question is, how much of a role do politicians play in the growth of the U.S. economy, which ultimately, affects the stock market.
Let's set something straight from the beginning. I am not going to be picking a side here. Personally, I think the whole political system is corrupt no matter who is in charge. You can take honest people and stick them in a corrupt system and things can get pretty damn messy. Power can corrupt even the most pure of souls. Here is some good news. Power in our system is distributed out over many, not one.
When I say not one, I am specifically speaking about the President of the United States. That person has a bully pulpit. Theodore Roosevelt first used this phrase to describe the platform a person has for advocating change. The President of the United States certainly has a bully pulpit, but what does that actually mean. How much power do they have in the way your life and my life are shaped?
Some folks might say a lot. I would say a little. Yes, the President has a big megaphone and they use it to try to convince people of their policies, but in reality, they can only make small changes in society. Bigger changes are made by Congress and even bigger changes are made by others (described below). Whether you like the person in charge at the time or not, do not overstate how much power they have.
That is good news! I would make the case we don't want that person to have very much power whether you voted for them or against them. There was a reason we risked our lives to escape a King. Now, let's look at how the economy and markets have done based on who was in charge. And when I say in charge, we have to look at more than who was President, but who was running Congress at the time.
Franklin Roosevelt, a Democrat, had the highest GDP growth of all time at over 10% per year on average. Herbert Hoover, a Republican, had the worst GDP growth of all time at about -9% per year on average. One could take that and say Democrats are good, Republicans are bad. Of course, that is too simplistic. There was a little thing called the depression during that time that had a major impact.
If you take the depression and put it aside, then what. Nixon, a Republican, had the next best period of growth at around 5.4% per year. Truman, a Democrat, had the next worse period of GDP growth at 1.4%. What do we take from that? Republicans are good when there is no depression and Democrats are worse. That is too simplistic as well. The devil is in the details and the unknown.
First, let's state the obvious. A 10% GDP growth is not sustainable and usually leads to some pretty miserable business cycles with a boom and bust economy. A 3% GDP growth on average is closer to ideal to avoid the severe turns in the business cycle. That business cycle has a major impact on the results connected to a President. The business cycle impacts the Congress in big ways as well.
GDP tends to drive the stock market. When the economy is growing, businesses tend to flourish. If that growth is too great, the federal reserve tends to step in and raise interest rates to temper the economy so it doesn't get too hot. The stock market does not like a higher interest rate environment. Let me rephrase that, the stock market hates it when interest rates are going up. Fast growth can be a negative.
Why does the market hate high interest rates? There are many reasons, but here are two big ones. One, borrowing becomes much more expensive, which means businesses become stale with little to no growth partly due to a lack of borrowing. Two, if you could lock in a CD at 10% for 10 years, or get a money market paying 10.5%, why would you risk your money in the stock market? The answer is, many people wouldn't.
Let's pause and highlight something that has probably already happened for many of you. Your confirmation bias kicked in. You read some information and then confirmed in your mind that you were right while discounting information that challenges your bias. It's hard to be objective. Information is filtered through what we "know" from our past. The problem is, we could be wrong.
Politicians are very good at taking credit for good things that are happening in the economy and very bad at taking credit when things go badly. People out of power are very good at showering blame on those in power, but are quick to reflect blame when they actually get into power. This plays out again and again and again. It's a dance they play with their friends in the media. Be mindful of it.
As I continue, I ask you to embrace a bit of humility. Accept the reality that what you know has been planted there by some really smart people in the past; some of them politicians. Many are in the media. They brainwash us as they feed that confirmation bias again and again steering us toward the information we believe is the truth. Be humble and accept the fact you could be wrong. I do. Back to the story.
Business cycles have a huge impact on how a President is viewed by people in the present. So does the Congress they must work with. So does the federal reserve, which will have a major impact on the economy as they attempt to "read the tea leaves" trying to place interest rates at just the right rate to avoid a recession while limiting growth to avoid the boom and bust cycle. It's complicated.
Some of you might think using GDP, gross domestic product, is a poor way to evaluate a Politician. You might be right. There are many ways to evaluate politicians. A politician can be good for your pocket book and a bad person. A politician can be a good human being, and be detrimental for your financial climb toward success. And yes, they can be a good and good or bad and bad. Life is messy.
The President is basically the CEO of the United States. He doesn't run the United States. He represents it. The people who run the United States are business owners and their employees. They are the driving force behind the stock market. Politicians either cause them more headaches or less based on their policies and their rhetoric. There is a lot of rhetoric whether they are a Democrat or a Republican.
That is another way of saying there is a lot of hot air. This is noise we investors must tune out. It can cause us to make bad emotional decisions when it comes to our money and how we invest. Going to cash when there is a politician you don't like is a mistake. Going totally out of cash when there is a politician you do like is also a mistake. Once you have voted, it is best to ignore politicians when it comes to your finances.
Will there be winners and losers with each politician who wins? Hell yes. That applies to both parties. Let's not be naive. Both parties are controlled by money and the donors who have it. When their person wins, the donors get what they want. When their person loses, the donors figure out ways on how to do it better next time. Yes, it is a screwed up system, but it is still, by far, the best one we humans have come up with.
Now what? I don't know and no one else does either. There are so many unknowns coming that will affect how we deal with our money. Covid was the last big one. There will be others and the next big one will have an outsized effect on those politicians, whoever they may be. You and I cannot see the future and that means we should not try to invest based on what we think the future holds.
Ultimately, YOU will have the biggest impact on your finances, not some politician. It will come down to your decisions as you live your life over many decades (hopefully) and many political cycles. The better you can manage your emotions, the better off you will be managing money and investing it wisely in those low fee index funds. Focus on what you have control of, and let go of what you can't. Freedom to follow!
