Five Truths About The Presidential Election, No Matter Who Wins


 

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Transcript

Zach – Hey everyone, Zach Holcomb here with Michael Reese certified financial planner. Back with this week’s blog. Today we’re gonna be talking about five truths about the presidential election, no matter who wins. Mike, I know you had a lot of great insight on this today, so let’s jump right into it.

 

Michael – All right, so Zach, I’ve got this. You can kind of see it right here. This is a great little, we both have a copy of this, a great little article that came out thanks to the good folks at Invesco. And they did a little research about the 2020 presidential election and kind of these, they said, look here’s some things that we know no matter who wins the election, we know these things right? So let’s look at the very first one of the five. It says markets have performed well under both parties. So you’ve got this in front of you. What are you seeing as you look at this? What jumps out?

 

Zach – I see a lot of stock market performance that is positive and very little that is negative.

 

Michael – Yeah, it says, you know, it’s kind of interesting. It says the S&P 500 index sets. You know all the big companies out there it’s delivered annual return of about 11% over the past 75 years, doesn’t matter if Democrats are in office or Republicans. Doesn’t matter, they said the only time the return was negative was either 2008, financial crisis. I mean, can’t fight that one or its stagflationary spiral in the early 70’s. Zach, do you even know what the heck stagflation is? Have you ever heard of that term?

 

Zach – It rings no bells.

 

Michael – It’s basically where you have not only is inflation going down, stagflation’s coming, inflation is going down versus up, you know, where instead of things costing more money next year they actually cost less money next year. And that’s a really dangerous thing for an economy. If you have a growing economy prices should be growing as well at not necessarily a large amount but you know, some small amount to keep pace with inflation or to keep pace with the growth of an economy. So, that’s kind of interesting. And the one thing that I found interesting on this is the, when you actually look at history, the correct statement is neither parties, Zach, can lay claim to either superior economic performance or market performance. So in other words, they’re saying history tells us it really doesn’t matter who the heck’s in office you know, good things tend to happen in markets, right?

 

Zach – You would think otherwise listening to all of our presidents claiming the success in the economy.

 

Michael – Oh, and the radio right? If you listen to the radio and the news media you know, clearly the markets care a ton, not as much. Although, you know, I did notice recently I saw in the news that if Biden wins that because the markets expect him to increase taxes that that would have a bit of a negative impact. Whereas if Trump wins they would expect he would not increase taxes. So that would have a positive but overall, these are minor things, not major things.

 

Zach – Right.

 

Michael – All right, let’s go, what’s number two. Go ahead and read what’s number two, the, the second truth.

 

Zach – So no matter who is president we do not radically re-engineer the United States economy.

 

Michael – Ah very good. So if you, here’s the thing in reality, it’s kind of hard to say this but it’s true. Presidents don’t have a lot of power in actually, you know in actually driving market performance. They just don’t. One of the things that is very true about this is that we don’t radically engineer the economy. So they have this kind of breakdown here. And it says you know, if you look at this chart here. So see how right up here. That’s the percentage. Notice how stable that is. It’s very, very level. And what they’re saying is that since 1947, consumer consumption has driven something about 2/3 of the economy is driven by you and I spending money, that drives 2/3 of the economy. Since 1947, and that’s held true. And the other 1/3 is broken down between you know, business investing and government expenditures. So basically you know, unless you change that dynamic dramatically you’re not gonna see an enormous change in who’s, you know who’s elected president and whoever’s elected president. That’s not going to change. So they talk about among the biggest fears among investors is that like a progressive or a socialist candidate might radically re-engineered the economy. But the problem is that the president they don’t get to control the economy by themselves do they? They’ve got to, you know, deal with congress. They have to deal with the senate. And they said that despite concerns about major governmental policy changes the business investment, government investing or government expenditures, consumption, they’ve been remarkably consistent.

 

Zach – Right.

 

Michael – So, you know, we’ve seen the government create all these different programs yet in the grand scheme of things, you know, they seem like really big deals but when you compare what they’re actually doing to the overall economy, just not a lot happening there.

 

Zach – Right.

 

Michael – Right. And so if that doesn’t really change, then guess what? The economy, that’s not really gonna change. So the markets probably aren’t going to change a lot. They just kind of move along their merry way.

 

Zach – Right.

 

Michael – Good years and bad years, you know, that kind of thing.

 

Zach – Right.

 

Michael – All right, what’s our next one here, Zach

 

Zach – Our next point is the historical narrative is not as accurate as we remember it.

 

Michael – What, you’re saying we don’t remember history, Zach?

 

Zach – I guess we don’t.

 

Michael – Yeah so here you go, this is great. Think about Jimmy Carter, now this is well before your time, most people who think about Jimmy Carter as a president, they remember a complete catastrophe you know, one term president absolute mess, but here’s what they don’t remember. He actually presided over significant job growth. Jobs were growing like crazy during his administration. Yet, if you ask people that they wouldn’t you know, they wouldn’t be able to understand. I’m sure they wouldn’t believe that, they would assume the opposite. Reagan, right, what’s Reagan famous for? Do you know what Reagan’s famous for? There’s a couple of things by the way, but what’s he famous for?

 

Zach – You’re gonna have to help fill in the blanks for me.

 

Michael – Zach did you go to college?

 

Zach – I did.

 

Michael – So here we go folks, I’m talking to a college graduate, a very smart guy. And by the way I could ask my daughter who’s the same age. She wouldn’t know the answer. I think we’re not teaching history in high school and college like we used to. Anyway president Reagan, he’s famous for a couple of things. Number one, he’s credited with basically killing off the cold war, the USSR. He killed off the Soviet union, or he’s credited with that but basically when, it’s because of him that the Berlin wall came down. In many its, and I don’t think it’s necessarily because of him I think that there were a lot of other factors surrounding that, but certainly he spearheaded a lot of that effort, but here’s the other thing, he is credited also with an enormous tax cut. When he entered into office top tax brackets were in the 70% range in 50 to 70% range. He brought top tax brackets all the way down to he had, there were two tax brackets, when he got done with things. You had 15%, 28%. That was it, there was nothing else. Can you imagine that Zach? You know, how many tax brackets are today?

 

Zach – More than we can count.

 

Michael – Like six, seven, eight tax brackets. Imagine how simple that was. Two tax brackets, 15%, 28%, that’s it, ain’t no more, right?

 

Zach – Right.

 

Michael – Anyway, a lot of people did not like that approach. They call it trickle down economics. He believed that you were better off to put money in the pockets of the people and let them manage it and the economy would grow. And what’s interesting is everyone credited. They said look, “You are just benefiting the rich” that’s, you know, tax cuts benefit the rich.

 

Zach – Right.

 

Michael – That was the mantra at the time. Yet, what was the truth? The truth was under Reagan income for those in the 50th percentile, which are the middle class. They saw their income grow by 20%.

 

Zach – Wow.

 

Michael – So by 20%, so what happens is, and they’ve got others. You don’t like, you know, they’ve got, you know, what we remember believe about Obama and what reality is, and same with Trump but the reality is very often when we look back at presidents, we have this impression of kind of what things were like during their presidency. We had this in our minds and in many respects, the reality is completely different. So there you go, what? So that’s number, what was that? Was that two? That was three, right?

 

Zach – That was three.

 

Michael – Holy cow, we’re moving. What’s our next one?

 

Zach – Our next point is monetary policy matters more than you think.

 

Michael – Oh, I love this. You know what this says? Don’t fight the Fed. Best advice I can give any investor. Don’t fight the Fed. Meaning that if you want to know who really has the power to drive markets it’s the federal reserve. So, you know, they hear this article. They say, you know, for all of the focus that we put on the executive branch, and by the way, Zach, since we’ve just learned, you didn’t study history like you should have the executive branch. That’s the president, sorry, I can’t help myself making a little fun of you there. You make fun of me being old. So there you go.

 

Zach – I do, yeah.

 

Michael – All right, so for all the focus put on the executive branch or the presidency, Invesco, they say “We would argue that it’s monetary policy that matters more. And the old adage holds true, don’t fight the fed,” which is about the fourth time I’ve said that. Currently the fed is providing a policy support but they do not intend to cut rates meaningfully as a result, we expect the current environment to remain relatively comfortable for stocks. And here’s the thing, it’s all about Tina. So Tina, when I say the name, Tina, T-I-N-A, Tina, what do you think of?

 

Zach – A woman?

 

Michael – Yeah, you do right? Like, and probably in your mind you remember someone named Tina that you remembered in your past, and you have a picture in your mind. But in this respect, when we say don’t fight the fed, Tina, today means it’s an acronym. There Is No Alternative. What the fed has done is they have interest rates so low that if you want to make money investing at all, you have no alternative. You must invest in stocks. That’s what the Fed’s essentially doing. They’re giving you no other alternative. And as a result, we’re seeing the stock market do quite you know, even though March happened we’re still seeing the stock market do quite well. “Historically,” it says “presidents had been hurt or helped by monetary policy both Reagan and Clinton benefited from consistently falling interest rates, both president Bush’s. You know, the older and the younger were hurt by fed tightening. An inverted yield curve a recession, president Obama benefited. So in other words, you know if you look at, when were the market’s doing the best, the presence in office both Republicans, Democrats they both benefited or been hurt simply because the fed’s out there doing whatever it does independently.

 

Zach – Right.

 

Michael – So the thing that you have to watch for is instead of focusing on the election as to what try and figure out what the markets are gonna do probably you’d be better off focusing on what the Fed’s doing.

 

Zach – Right.

 

Michael – So there’s your monetary policy All right, we’re coming up on a number five, right?

 

Zach – Oh, this is a big one too. Now this may come as a surprise to some people, but markets don’t care. If you do not like who is president.

 

Michael – What?

 

Zach – It’s a shocker, right?

 

Michael – You know what markets also don’t care when you’re gonna retire. They don’t care, if you are waiting for your accounts to hit a certain level before you sell. It turns out markets have no idea who you are and they don’t care

 

Zach – They’re not working in my best interest all the time?

 

Michael – I know it’s like we have a crystal ball in our office to try to figure out, you know, what markets are going to do. It doesn’t work very well. Other than, as a magnifying glass and it’s pretty heavy paperweight, but yeah, markets don’t care. But this is, I think this was really interesting. So check this out. Let’s pretend that the presidential approval rate is and this goes back to 1960. So this goes back for 60 years. Let’s imagine the approval rate of the president is over 65%. So what percent of the time does that actually happen? Where people actually seem to like the president, you’ve got it in front of you.

 

Zach – It’s for lower than 65 approval rating.

 

Michael – No above 65%, the top one.

 

Zach – 13%.

 

Michael – Yeah actually 13.9. So 14%, sounds like one year out of seven or one president out seven, probably, you know, it’s very rare for that to happen

 

Zach – Right.

 

Michael – Where the majority, like 2/3 of the country actors say, oh, we like this guy or gal. Well, it’s always been a guy so far, right? But here’s the thing when that happens, the markets only earned about 5% a year on average. In other words, not in great environment for markets. It’s like, if everybody likes the president, bad stuff’s probably coming.

 

Zach – Right.

 

Michael – That’s what it means. Now let’s go the opposite, end of the spectrum. Minus let’s say the presidential approval rating is below 35%. How often does that happen?

 

Zach – 6.6%. Michael – Yeah, this one’s almost never. And what’s the market do in those conditions per year? Zach- Down almost 20%.

 

Michael – Yeah, down 20%, basically this is 2008. All right

 

Zach – Yeah.

 

Michael – It’s like, and guess what? It’s no wonder the markets are losing to the crashing and burning. Of course you don’t like the president. And I mean, we don’t like anything when that’s happening right?

 

Zach – Right.

 

Michael – So those are the, that’s not what normally happens. Normally the approval rating of the president is either between 30% up to 65. So we can break that to two components so we can go 30% to 50%. So the approval rating for the president, somewhere between 30 and 50% or approval rating for the president between 50 and 65%. Which one of those, and those both happen about 36% of the time, it looks like right?

 

Zach – Right.

 

Michael – That’s the majority overwhelmingly, that’s where we fall. So here’s the question. What’s better for markets, a president that has an approval rating between 50 and 65%. So, you know, a little more than half the people really approve what the president’s doing or the opposite where it’s between 30 and 50% were less than half the people approve what the president’s doing which one’s better for markets?

 

Zach – Based on what we see here, 30 to 50% approval rating.

 

Michael – Shocking

 

Zach – Right?

 

Michael – This is the thing, overwhelmingly the best environment for the stock market is when you have somewhere between 30 and 50% approval rating, that gives us 15% returns per year. On average, guess what Zach? I don’t really care who gets elected this year. I think odds are pretty good. We’re gonna fall in that category.

 

Zach – Absolutely.

 

Michael – Right, wouldn’t you think, because neither of the people running have overwhelming support from what I’m seeing.

 

Zach – Right.

 

Michael – So that actually bodes well for markets. That’s kind of a positive sign.

 

Zach – Right.

 

Michael – So that’s kind of cool to see. I just thought that was kind of interesting though.

 

Zach – That is interesting and you would never think that.

 

Michael – I mean right? Wouldn’t you imagine that markets should do better when presidents are like, hey, the markets are doing great. We like the president

 

Zach – Right.

 

Michael – But instead what happens is the markets are doing great. Now let’s find something to complain about, oh, we’ll pick on the president.

 

Zach – Right.

 

Michael – Maybe that’s our news media in action, but who knows? So let’s do a quick recap on this. ‘Cause we do have a bonus, I know,

 

Zach – We do.

 

Michael – But let’s recap our five truths about markets. Number one, it doesn’t really matter. Republican, Democrat, the market doesn’t really care, who’s in office. It tends to perform well either way over time

 

Zach – Right.

 

Michael – With some glitches. Two the second one was you know, it doesn’t matter who the president is. We don’t radically re-engineer the US economy about 2/3 of the economy of GDP is based on consumer spending. As long as that’s the case. It almost doesn’t matter who’s in office. You know they’re not going to affect the markets to any great degree.

 

Zach – Right.

 

Michael – Third, is let’s see. Yeah, historical, sorry I’m working through my papers here, everybody. The historical narrative is not how we remember it. In other words, you know you often think things were true, when they’re not. Fourth monetary policy, you want to know what guides markets, it’s not who the president is. It’s, who’s running the fed and what the fed’s doing. And then number five in a shocking development markets don’t care if you like who the president is or not. In fact if between 30 and 50, if the president has an approval rating between 30 and 50%, which means the majority aren’t approving that’s by far the best conditions for the markets to grow. All right, here we are Zach. We’ve come up on the bonus.

 

Zach – Time for the bonus.

 

Michael – Bonus truth about markets.

 

Zach – Right.

 

Michael – What have we got?

 

Zach – And I know that this may come as a shock to some people.

 

Michael – And presidential elections and markets. All right What you said, this may come as a shock. What is it?

 

Zach – This election is not the most vitriolic election.

 

Michael – Vitriolic?

 

Zach – Vitriolic, yeah.

 

Michael – Say that word five times fast, right?

 

Zach – Oh, it’s serious.

 

Michael – Oh wait it’s not the most vitriolic election, really?

 

Zach – It’s not.

 

Michael – But Trump is known for that. Well, here we go. As it turns out, by the way, we have a long history in this country, this is, this goes back by the way, to the fact that we think history is one way, when it’s really not. Here we go all the way back to our very first president who’s our first president Zach?

 

Zach – George Washington, even I know this one.

 

Michael – Even we know that one.

 

Zach – Yeah.

 

Michael – George Washington was quoted as saying about newspapers or the press, the media, “Newspapers are filled with all that invective, the disappoint, ignorance of facts and malicious false hoods that could invent to misrepresent anyone’s politics.” By the way, do you think that could have come out of our current president’s mouth

 

Zach – I think he’s quoted George Washington a few times on that.

 

Michael – Although he’s not used such fancy language.

 

Zach – Right.

 

Michael – Thomas Jefferson, do you know which president, he was?

 

Zach – Fifth?

 

Michael – He was number three.

 

Zach – Three, oof.

 

Michael – So Thomas Jefferson our third president says, and I quote, “Nothing, nothing can now be believed that is seen in a newspaper. Truth itself become suspicious by being put into that polluted vehicle.” Holy cow, that’s like, I mean, can you imagine, now by the way, a lot of people might say that about the media today

 

Zach – Right.

 

Michael – But that’s what Washington and Jefferson thought. In fact, no less, you know, while political debates and soundbites make for contentious TV today, nothing compares in recent memory to the vendetta between sitting vice president Aaron Burr and treasury secretary Alexander Hamilton. They were fighting over an election so much they ended up dueling with pistols. And that was a where Aaron Burr actually killed Alexander Hamilton in a duel. So as long as we’ve got, what is it? Mike Pence and Kamala Harris, not dueling with pistols. It’s not as bad as it was back then.

 

Zach – Way the first debate went they might duel.

 

Michael – Yeah, I’ll tell you that isn’t… Anyway and so that’s way back at the beginning. oh, but you’re saying Mike, it got better. You know we grew up and things got better before they got worse, oh really? So I have come across this article and it was this article where so Zach, I’m gonna read this. But this is like, this tells you how much time I you know, like what do I do with my time? How did I even come across this article? I don’t know. But it was an article about a diary that a 29-year-old school teacher wrote one winter when she was stranded on Isle Royale up on Lake superior, up in Northern Michigan. And so she was a school teacher. She had like three kids. She was teaching them there. But anyway, here we go, in her diary, October 19th, 1932, you’re going to love this. Listen to the words she uses.

 

Zach- Okay.

 

Michael – She says “We had a terrific thunderstorm which rather spoiled the bombastic political speeches. We heard Ogden Mills, Republican and Roosevelt, Democrat. And decided to vote for Norman Thomas.” So in other words, she’s listening to these two guys running for president. Its like, I don’t want either one of them, I’m gonna vote for somebody else.

 

Zach – Right.

 

Michael – She goes, it is no wonder people become socialistic or even Bolshevik in their ideas,” Hey check this out “when they have to listen,” and we could say this today. “When they have to listen to the political drivel of a nature that we are hearing now.” it’s like, and you know, here, she says, “All of us with $8 in the bank, $65 a month for 12 hours a day of nerve wracking work, all the turnout more boys and girls to become a rotten grafting politicians.” And then she writes baa with exclamation point.

 

Zach – That’s funny the language has changed, but the point remains the same.

 

Michael – Yeah, she finishes up her diary entry with this. “I’m going to bed, I’d rather hear good old Lake Superior roar against the rocks than any more hooey.”

 

Zach – That’s funny.

 

Michael – You know, imagine when she would write based on the, it sounds to me like what she’s saying is instead of watching presidential debates back then, they were listening.

 

Zach – Right.

 

Michael – But it sounds like it was all the same stuff that we get today.

 

Zach – Exactly.

 

Michael – So is it really worse today than it was in the past? No, is our media more prevalent? Is it in our face more between social media and, you know, 24 hours, seven news cycle? Yes, so there you go, I thought that was interesting and fun. So there, I thought that’d be a good way to wrap up today’s discussion. So Zach, as we wrap up anything else before we finish up today’s discussion?

 

Zach – No, that was great insight, Mike. And if you want a copy of this article, if you can just send me an email, it’s Zach@cenadvisors.com, more than happy to send this report your way.

 

Michael – Fantastic, remember everyone, if your clients, you know, we’re coming up here in November we’re gonna have our year end review meetings. For those of you who are not clients, if you’re in a position where you wanna talk to us about, you know, helping to make those smart choices with your retirement planning, whether you’re thinking about, you know, how do you generate income? What do you do about taxes on your IRA’s and 401K’s, that’s been a big topic lately, you know, protecting yourself from market corrections, you know, whatever the topic is. We’re always happy to talk our phone number 512-265-5000. And with that, remember, your retirement, it should be the best time of your life. You deserve to have and enjoy your dream retirement. Let’s just make sure that together, we’re making those smart financial choices and smart financial decisions so that you can truly enjoy the best That is to come. That’s it everyone hope you have a great rest of your week.

 

Zach – Thank you.

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