I have been speaking to many clients after the ‘Blue wave’ where both the Senate and House of Representatives switched to Democratic control. The results delivered a significant rebuke to President Donald Trump and his administration. For investors, the immediate question is what this means for their money. Some may be worried about the direction of the American economy, while others are concerned about higher taxes, increased regulation and the possibility that Trump’s agenda will be significantly curtailed. For Israeli investors with money in the United States, there may even be a temptation to bring their investments home.
I understand the concerns, but I tend to take a more measured approach.
After all, the United States is an enormous country, with more than 340 million people who will continue to get up every morning, go to work, start businesses, buy groceries, wash their hair and eat. It remains a global leader in ingenuity, entrepreneurship, research and creativity. None of that disappears because voters decide to change the political balance in Washington. Of course, politics matters. Government policy affects taxation, regulation, trade, energy and business conditions. But investors should be careful not to confuse political development with a permanent change in the economic landscape.
President Trump will have to deal with an opposition-controlled legislature for the final two years of his term. Democrats will have the power to control congressional committees, investigate the administration and block much of the president’s legislative agenda. Trump, meanwhile, retains his veto power and significant executive authority. The result could be two years of political confrontation and legislative gridlock.
As regular readers of this column know, I am a big fan of gridlock. While it may not make for exciting political television, there is something to be said for politicians being unable to pass legislation that could negatively affect our lives. Sometimes the best thing government can do for the economy is simply to provide stability and leave businesses and individuals alone.
While past performance is no indication of future returns, according to J.P. Morgan Asset Management, the S&P 500 has historically performed well under different political configurations. Average annual returns of 9.4% under a Republican president with a divided Congress are solid. The important takeaway isn’t that one political arrangement guarantees better returns. Rather, markets have managed to grow under different combinations of political leadership.
Economic fundamentals matter more to markets than which party controls Congress
Economic growth, corporate earnings, interest rates, inflation, and valuations are much better indicators of future market performance than simply looking at which party controls Congress. Just as certain sectors benefited under previous administrations, the new political reality could create opportunities in particular areas of the market.
A Democratic-controlled Congress may push for greater spending on healthcare, infrastructure, and renewable energy. Companies operating in these industries could benefit if proposed legislation becomes law. At the same time, Trump’s priorities involving tariffs, energy policy, and deregulation may face greater resistance.
Tax policy will also be an important issue. Democrats have historically advocated higher taxes on wealthy individuals and corporations. Investors will be looking closely for proposals involving a wealth tax, capital gains taxes, corporate taxation and other changes that could affect investment returns. However, passing legislation will not be simple. Trump has veto power, and major policy changes will require navigating the political and procedural obstacles that come with a divided government.
Investors should avoid panic selling and maintain a long-term strategy
The biggest mistake investors can make is to panic and sell because of political developments. The stock market has weathered wars, terrorist attacks, financial crises, inflation, recessions, and pandemics. There have been plenty of short-term declines, but over the long term, owning productive businesses through the stock market has been one of the most effective ways to build wealth. I know I sound like a broken record, but the basic principles of successful investing haven’t changed. Buy quality investments, diversify, keep costs reasonable, and maintain a long-term perspective. If markets decline, investors with sufficient cash and an appropriate risk profile may even have an opportunity to add to their holdings at lower prices.
Your portfolio should be structured around your financial needs, not around the latest election results or political headlines. Warren Buffett famously explained his investment philosophy by saying, “I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.”
That is a powerful way to think about investing. If you own sound businesses and have a properly diversified portfolio, you shouldn’t need to change your strategy every time there is a new president, a change in congressional control, or a political controversy.
No president is going to make sure you save enough for retirement. No senator is going to ensure that you live within your means. And no political party is going to guarantee that your children are financially prepared for the future.
Start saving early, spend less than you earn, avoid unnecessary debt, and invest consistently. Build a diversified portfolio that reflects your personal circumstances and financial goals. Don’t wait for the perfect economic environment or the perfect political administration to begin taking control of your finances.
You cannot control Washington. You can control how much you save, how you invest, and the financial decisions you make every day.
The information contained in this article reflects the opinion of the author and not necessarily the opinion of Portfolio Resources Group, Inc. or its affiliates.
Aaron Katsman is author of the book Retirement GPS: How to Navigate Your Way to A Secure Financial Future with Global
Investing (McGraw-Hill), and is a licensed financial professional both in the United States and Israel, and helps people who open investment accounts in the United States. Securities are offered through Portfolio Resources Group, Inc. (www.prginc.net). Member FINRA, SIPC, MSRB, FSI. For more information, call (02) 624-0995 visit www.aaronkatsman.com or email aaron@lighthousecapital.co.il