Sharks and Ice Cream: How Tumwater is Thinking About the Upcoming Election

As the media continues to suggest that terrible things will happen with the stock market if the wrong guy gets elected in November it would take an unusual amount of calm to not have at least considered the upcoming election and its potential impact on your portfolio, so I wanted to send you my thoughts.

Many people (virtually everyone in the media, it seems) believe there is a direct connection between who’s in the Oval Office and the results we get in the economy, the markets, and our portfolios.

There is zero historical basis for that belief.

Both the economy and the stock market are driven by far more than just the current political constellation.

Sharks and Ice Cream

Every year, shark attacks and ice cream sales spike at the same time.  Does ice cream consumption make us more attractive to sharks?  If we want to swim safely should we avoid eating ice cream?

Nope.

When it’s warmer, people buy more ice cream.  When it’s warmer, people swim more which leads to more shark attacks.

Every four years, both sides point to their favorite examples of economic and stock market success when their team was in power or how poorly markets and the economy did when the other side was in power.

Is either side right?  Does either side have a secret lever to make the economy soar?  Is the other side secretly sabotaging the stock market for some reason?

Nope.

The economy and the stock market are driven by businesses and the people that make them run.  Not governments.

Getting out of the stock market because you fear the other side may win in November is like telling your grandkids you won’t swim with them because you just ate ice cream and would be attacked by a shark.

You’ll likely avoid the sharks but what you’ll miss is difficult, if not impossible, to recover.

Republican Presidents vs. Democrat Presidents and the Market

Imagine you could go back and invest $10,000 into the stock market (the Dow Jones Industrial Average) back in 1896 and left it to grow till now.  That $10,000 would be worth nearly $7 million today (not counting dividends!) if it were invested the entire time.

But what if you invested that $10,000 only during Democrat presidencies in that 124 years?  What about if it were only invested during Republican presidencies?

Would it be higher than $7 million if it had only been invested when “our side” was winning?  Would it be lower than $7 million if it had only been invested when “the other guys” were winning?

If one party regularly created better economic conditions, you’d expect the stock market’s results during that party’s presidencies to be better than when the other party was in office.

But being invested only during Republican or only during Democrat presidencies resulted in that $10,000 never even cracking $1 million.

That partisan investment approach would have cost your portfolio more than $6 million!

Betting your life savings on whether or not “our side” is going to win in November has historically been a very bad decision.

Market Timing

Getting out of a well-diversified portfolio which has been custom-built to meet your long-term goals over time because of short term concerns (politics, pandemic, etc.) is nothing more or less than market timing.

I’ve come to believe the temptation to time markets is one of the downsides to having a well-diversified portfolio.  When we have a portfolio of more than 12,000 companies (as we do) it’s hard to see it as anything more than numbers on a computer screen.

But if we think about it like we would if we owned a single company like Coca-Cola, John Deere, or Costco (for example) I think we would make better decisions.

After all, are we really worried sales of Coke, tractors, and groceries would dramatically change based on the election results in November?

If the sales wouldn’t really be affected, would the long-term value of those business change in any meaningful way?

I don’t think so.  I think it’s the surprises out of the blue that have the biggest impact on the stock market.

COVID-19 was utterly unexpected this year and had a massive impact on markets.  The S&P 500 was down 34% in 33 days.

It has now more than fully recovered, meaning we experienced the entire bear market cycle in just under 6 months which should remind us of the futility of market timing and just how resilient the stock market really is.

It’s simply not possible for the results of the election in November to surprise us like that.  We know it’s going to be one guy or the other.

And while markets dislike even that level of uncertainty it’s difficult to believe either result could cause a COVID-19 level downturn.

Even if it does, we’ve just proven we can survive that!

The strategy that has served us so well through the years will continue to work through this election and all the elections to come.

That strategy is to hold at least 5 years’ worth of spending in conservative bonds and cash so we can wait out whatever markets might throw at us in the short term and invest the rest in a thoroughly diversified portfolio of the biggest, best managed, companies in the world.

The average bear market through history has lasted just 3.5 years from peak to trough back to the previous peak so a 5 year reserve fund in the portfolio gives us the ability to weather market storms.

After that, all we have to do is keep the faith and hang on through thick and thin.

We’ll be right beside you all along the way.

PS: Here are some great pieces I’ve come across recently:

• Brian Wesbury’s 8/31 Monday Morning Outlook essay
• DFA’s “What History Tells Us About Elections and The Market” video
• Invesco’s “2020 US Presidential Election: 10 Truths No Matter Who Wins” Webinar