Transcription
What's up you guys, it's Graham here.
So first of all, I usually don't make dedicated videos centered around the topic of politics, but I've noticed a lot of false information, fearmongering, and misconceptions floating around on the internet, and I'd like to set the record straight. As I'm sure you've already seen, Trump has been elected as the next president of the United States, and this means that most likely there could be some rather significant changes coming soon that you should be made aware of, especially when it comes to the market, your money, and the economy.
Obviously, some people are going to be really happy about this, and other people are going to be really upset. But regardless of where you stand, please do me a favor and go into this video watching it with an open mind, because I'm just going to show you which candidates historically have the highest returns for the market based on the data and then what this means for the next few years in terms of what you could do about it to make as much money as possible.
Although before we start, as usual, if you appreciate videos like this, all I ask for in return is that you hit the like button and subscribe. It takes you a quick second, it's totally free, and as a thank you for doing that, I will do my best to reply to as many comments as I can. So thanks so much! Also, a big thank you to @Sleep for sponsoring today's video, but more on that later.
All right, so first of all, I want to give full credit to the blog The Market Sentiment for helping me compile all of this information. I would not have been able to have done this without them, and because of that, I want to link them down below in the description. They have a fantastic newsletter that goes over some really interesting investment analysis. In this case, their findings have to do with which political party has the highest stock market returns.
Well, in terms of the presidency, here's what you came for: as far as who has the highest stock market returns, the data shows that the... okay, in all seriousness, according to the data compiled by The Motley Fool, technically since 1957, Republican presidents have garnered an average 10.2% return versus Democrats' 9.3%.
But if you thought we were done there, case closed? Oh no! In fact, this is just the very beginning in terms of which party is better for the market. As it turns out, the presidency is only a small piece of the puzzle, and a much more important aspect to consider that has a much bigger impact on your money is Congress.
See, here's the thing: from an investment standpoint, many companies are worried about changes of policies that could affect their stock price. In this case, any change from the status quo could result in more uncertainty and therefore lower prices. But for any new laws, regulations, or taxes that go into effect, it's got to pass through a checks and balances system.
This is why the president can't just go and say, "I'm going to raise taxes 5% on everybody unless you hit the like button and subscribe right now!" Even though the president certainly does have a lot of authority, for any significant changes to go into effect, it needs to go through its due process of review.
First, it gets brought up and negotiated in the House of Representatives. If it passes, it then goes to the Senate for further review and negotiations. If it passes the Senate, it could go to the president, who signs off on it and it's enacted, or it could be vetoed. This means it goes back to the Senate, which has to pass it with a two-thirds vote to override the president.
In this case, it becomes very apparent that the highest overall stock market returns, believe it or not, come from a divided Congress where one party controls the House and the other controls the Senate. In fact, a Republican president with a divided Congress sees the highest returns of 13.7%, while a Democrat president isn't too far behind at 13.6%.
Beyond that, it seems like a fully Republican Congress, like we're soon going to have, yields the second highest returns at 13% and 12.9%, regardless of who's president. The lowest returns come from a Republican president and Democrat Congress at just 4.9%.
But once again, those returns are a little bit deceiving because even though you could look at this and see that technically one party is slightly better for the markets than the other, that could also have to do with the next president having to pick up some of the pieces. For example, Bill Clinton: when you look at his performance, he left at the very peak of the stock market right before the dot-com bubble crashed, leaving George Bush to try to turn the economy around, especially after the impact of 9/11.
Then his second term ended with the beginning of the Great Financial Crisis. So we had a Democrat president leaving a very tricky market for a Republican president, leaving a very tricky market for a Democrat president. The whole thing is a mess.
All of this goes to show that the president has much less direct control over the market than most of us attribute. The same could also be said about those who only invest when their political party is in office. In fact, if you chose a side, the data shows that you would have underperformed the market by millions of dollars.
So that then leads to the question: what should you do about all of this, and where are we going to see the highest returns over the next few years, especially now that Warren Buffett has grown his cash pile to $325 billion?
Well, in terms of what happens historically throughout elections, one thing is certain: more investors move to cash. In this case, most money is shown to move into equities like stocks during the first year of a presidential candidate, then slowing down dramatically in the second year, and then building up again throughout the end of the term as investors move their cash into safer, more stable accounts like money market funds.
But even though this sounds like a safer strategy, it's consistently done pretty badly. For example, throughout the last 23 election cycles, if you invested $110,000 on January 1st of an election year, you had the best outcome 60% of the time. If you split $10,000 into $1,000 a month of each election year, you had the best outcome 26% of the time. Finally, if you waited on the sidelines and only invested after the election, you only had a 13.3% chance of coming out on top.
All of this overwhelmingly suggests that the best result is to simply stay invested, even before the election takes place.
Although in terms of what you could do now and which investments make the most money going forward, here's where things get very interesting. Although, before we go into that and the repercussions this could have throughout the entire economy, at the end of the day, it's probably nothing you should lose sleep over, especially if you're anything like me and you tend to get in bed, overthink everything you've ever done, and then get frustrated when you go and look over at the clock, realizing you're getting under 5 hours of sleep if you could fall asleep at all.
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All right, so in terms of where to invest and what investments make the most money, you're going to want to hear this. Even though both Republicans and Democrats have private and public donors, the Magnificent Seven, which have done the best over the last few years, overwhelmingly donate to Democrat candidates, with the exception of Tesla.
Why, you might ask? Well, to dive into this a bit further, research from Sparkline Capital got to the bottom of what's going on, and here's what I found surprising: since the 1950s, the political gap between the left and the right has been widening at an alarming pace. As of now, the ideologies between Harris and Trump would make them the most liberal or conservative presidents in the last century.
Yeah, seriously. As an example of this, just take a look at the political climate since the 1990s. What used to be common ground has turned into a stark difference of left versus right. But the companies that produced the highest returns recently have been Democrat stocks, which lean left and tend to be focused within industries of big tech on the West Coast.
So they must be better, right? Not so fast. Actually, long-term, both Democrat and Republican companies offer almost identical returns, just depending on the state of the economy. For example, with the exception of the dot-com bubble, Republican stocks outperformed from 1997 through 2018.
Then we saw a flip where Democrat stocks skyrocketed as big tech dominance surged, even during a time where we had a Republican president. So what does this mean for you as an investor? The answer is that political affiliation makes no difference. There's no systemic advantage to one or the other, and in the long term, everything balances out.
On top of that, whether or not a company supports one side versus the other also makes very little difference. You would think that a company that donates to Republicans during a Republican presidency would do a lot better or get some special treatment, but instead, almost the opposite happens.
The data shows that since 1997, companies that support both sides or donate to Congresspeople who share similar values, regardless of their affiliation, outperform the companies that predominantly donate to one and not the other. The reason for this is that, as they say, partisan contributions are more likely to be ideologically driven, motivated by social views, and other factors aside from maximizing financial returns.
This is less likely to affect the bottom line. They also go on to theorize that political homogeneity may foster harmful groupthink and invite unwelcome controversy. So, in a way, it's good to hire people who don't think the exact same way as you do.
Ultimately, all the research shows that the economy is a much better indicator for how the stock market returns, and the sitting president has much less of an impact than Congress does. But you also then have to ask yourself: what about investing in companies that are likely to get a lot of funding over these next few years?
All right, so just imagine this: in 2016, Trump won the presidency, and the consensus was that this must be really good for energy and oil stocks. So those have to outperform clean energy, right? Wrong! As it turns out, during the Trump presidency, clean energy outperformed traditional energy by 43% a year.
Okay, but what about Biden? Because he pushed for a lot of mandates towards clean energy, so that's got to be really bullish for clean energy, right? Again, you would be wrong. During his presidency, traditional energy outperformed clean energy by 53% a year.
In terms of why this happens, here's what the investment manager Fidelity had to say: it's exceedingly rare that a candidate will be able to deliver on exactly what they promised once they take office. If you're making investment decisions based on such proposals, that could be a risky way of managing one's money.
On top of that, this chart illustrates the point perfectly. As you could see, there's near zero correlation between industry and overperformance. Even though you could make the argument that Republicans are slightly better for traditional energies more times than not, it's not always the case.
In most circumstances, the overall health of the economy is going to play a much more important role. The same thing also applies to post-election losses or profits. Like over the last 100 years, it was found that both Republican and Democrat victories led to near identical outcomes in the 30 days after an election.
Although could the same also be said about tax policies or things that have a significant impact on you watching? In order to answer this question, here's a high-level overview of what's being proposed under the Trump presidency.
Capital gains and income tax rates would most likely stay the exact same. Estate and wealth tax cuts would be made permanent, which means if you're worth less than $28 million, it really makes no difference to you whatsoever. And if you're worth more than that, your heirs are going to get slightly more money, but you're going to be dead anyway.
Now, if you run a business, here's where things get really interesting. Trump has recently proposed lowering the corporate income tax rate from 21% to 20% and lower that number even further to 15% for companies that manufacture their products in the United States. This, in theory, would save businesses more money; it's probably good for your investments, and the hope is that this money would go back into the business to hire more people.
In terms of whether or not I think this will actually happen and businesses won't just pocket the money for a rainy day, I have my doubts, but we'll see. Separately, as a way to help pay for all of these tax cuts, tariffs have been proposed of 10 to 20% and 60% tariffs on U.S. imports from China.
Some people make the argument that businesses will have to raise their prices in order to compensate for this, but it's yet to be seen. Beyond that, new policies could reinstate itemized deductions by expanding the Tax Cuts and Jobs Act. Again, good for businesses; allow a $5,000 Universal Child Tax Credit; and exempt benefits like Social Security from taxation.
So what are my thoughts, and what could you do about all of this? Well, from a policy perspective, most of these proposals very much benefit business owners, who are able to take larger tax deductions in a lower tax bracket, depending on how it's structured.
Does this impact the average person? I would say it does, but some people are going to see greater benefits than others. The honest answer is that it can benefit everybody if business owners use the extra money to reinvest back into their infrastructure, hire more employees, or buy more inventory.
But there's also a chance that the business owners just take the extra money, go and invest it somewhere without marginally higher returns, and there's not as big of an impact as some people think outside of stocks. Beyond that, though, for the average W-2 employee earning a salary, you're probably not going to see that big of a change, and a lot of things are going to be the status quo, as they have been for the last few years, really just depending on the state of the economy.
Obviously, stocks and cryptocurrency have risen on the news of a Trump presidency, and it's awesome to see such large gains, but I would be cautious of whether or not these types of returns are sustainable going forward.
The way I see it, from a policy level, some people are going to see much more money back at the end of the day, some people won't, and some people might even have higher prices depending on the impact of tariffs and exactly what goes into effect. It's too early to tell, but this is only a small piece of a much bigger picture.
Like I mentioned earlier, that's why I'm a firm believer that it's a much more prudent situation to look at your own life right now, look at yourself in the mirror, and ask: what can I do today to improve my overall financial situation? Is that working overtime? Is it learning a new skill? Is it ensuring career stability? Is it getting rid of excessive overhead? Is it cutting back expenses? Is it investing consistently?
All of these are going to have a much more significant direct impact on you immediately than the presidency and any upcoming tax policy.
And look, I get it. There are so many nuanced arguments for or against everything going on, but at the end of the day, I'm a finance nerd. When I just look at the numbers in relation to the stock market, it's really shown that all of this has very little difference as long as you just consistently invest in a diversified portfolio long-term.
However, I will also say that with all of that said, it has shown that historically, a Republican presidency with a Republican Congress has produced some of the highest returns in history, and even though it's not a guarantee, things aren't looking optimistic based on the data.
So with that said, again, I will link to The Market Sentiment newsletter down below in the description, who is kind enough to help me with all of this research, along with their sponsor Eight Sleep for anyone who wants to sleep great at night.
Thank you so much for watching! As always, I really appreciate it. Make sure to like, subscribe, and leave a comment down below so I could read it. Thank you so much, and until next time!