Policy Over Politics: Navigating Markets Amidst Political Uncertainty

As we enter the final stretch of the election season, we want to take a moment to reflect on the relationship between politics and markets. It’s no secret that political news can influence market sentiment, driving volatility and altering investment performance in the short-term. However, in the long-term, politics may be less of a factor for performance than expected.

History Doesn’t Lie.

The truth is, we all think the party (or candidate) we prefer is good for the markets, and the opposing party is bad. But neither is as good or as bad as people think. Data shows that throughout history the stock market managed to continue a positive long-term trend no matter which party was in control. Of course, there have been some major speed bumps along the way (such as the Global Financial Crisis, Covid-19, multiple wars, etc.), but you cannot attribute those events to the sitting administration as these things were either out of their control or an “inherited” problem after years of accumulated decisions by, frankly, both political parties.

Policy, Not Politics.

While politics might not matter as much for the long-term market performance, the resulting policies can. For example, things like tax policy and fiscal spending could have a direct impact on economic growth and the resulting value of businesses. However, the way the market ultimately reacts to such policy changes is a separate question, as the market is a forward-looking machine that weighs in expectations before events occur. You always need to ask: “how much of any new policy was already predicted to be the outcome before it was put in place?” It’s the outcomes that weren’t seen as probable that tend to move markets (up or down).

Policy changes will have an impact on certain stocks and sectors of the market. Energy policy, for example, would influence the performance of oil and gas companies. Government spending packages, as we have already seen, could benefit areas such as defense or domestic manufacturing. And there are plenty more potential policy outcomes that will create winners and losers that require deeper due diligence to uncover. Established, high-quality businesses with savvy management teams can usually navigate most policy changes profitably, no matter which party is in control. Those are the types of businesses where we seek to be long-term owners.

Poised for Shifting Tides

The bottom line: while it’s difficult to predict how the market will react to the upcoming election, we continue to believe the long-term trend of positive returns will prevail (not without the occasional bumps we know are inevitable), but we must continue to be diligent in positioning portfolios to be beneficiaries of the shifting tides of policy rather than be fearful of changes. So far, we’ve been able to navigate these changes, and we will continue to monitor the landscape to make appropriate adjustments going forward.

As always, we appreciate your trust and confidence in NPF. Should you have any questions or wish to discuss your investment strategy in light of recent developments, please do not hesitate to reach out.