This brief post takes a look at the market returns by political party in control of the White House and answers the question, should investors be concerned by the recent change in control?
This is not a political post. In fact, one of my New Year’s resolutions for 2021 is to read and talk about politics less, unless it directly relates to taxes or investment regulations. Political discussions right now in the US generate too much passion from both sides, and honestly I don’t find them productive in any way. Most people are not about to change their viewpoints as they have an army of social media supporters on their side, whichever side that is.
My resolution got off to a bad start for the first 20 days of the year, especially day 6, but it is time to pick it back up. Investors, you see, should be indifferent to politics. For long-term investors focused on retirement, which party controls the White House does not matter.
I know, I know: “but everything is going to change!” “Taxes will go up!” “The world is coming to an end.” “We need cryptocurrencies to save ourselves!” “I don’t look good in that color!” I hear this a lot.
Taxes seem to be the top concern, and even I think the probability of a tax increase in the next four years is high. The stimulus spending by the last administration and the stimulus spending being proposed by the new one needs to be paid for somehow. But the way our government usually works, when taxes increase, so do tax loopholes.
To review this, The Urban-Brookings Tax Policy Center has compiled individual average tax rates between 1979 and 2017. This reflects the federal income taxes paid by individuals divided by total gross income. Gross income is before any pretax adjustments to income including retirement plan contributions, medical insurance, and social taxes. We are more custom to talking about effective tax rates as a percentage of taxable income so these rates will seem lower than you think. This calculation provides a more accurate picture than simply looking at taxable income or published tax rates because actual paid taxes divided by gross income captures the effect of the changing tax loopholes. The downside of this data is that it takes time to gather, so the most recent information is from 2017 and does not include the most recent tax changes President Trump signed into law.
I present the 1% here for fun because the “top 1%” seem to get the most press, but the highest quintile, the top 25%, impacts many more of our readers.
The data shows that rates do tend to rise under Democratic leadership and fall under Republican leadership. Interesting note, however: both the highest rate (17.6%) and the lowest rate (13.4%) came under Democratic leadership. Also, the most recent drops in the rates (excepting Trump’s, which are not reflected here) were due to economic disasters—the Dotcom Crash in early 2000s and the Great Recession in 2008–09.
We can all agree that taxes should be minimized in every possible legal way, but investing, like running a business, is not about focusing on taxes. If you do, you can easily avoid almost all taxes by simply not making any money. That is not fun. Allowing fear of paying taxes to run the show is the tail wagging the dog. Returns need to be the priority.
Let’s drop the 1% tax rate from the view to declutter the graph and add the S&P500 annual returns:
The first thing that pops off the chart is that President George W. Bush had a bad run of it, starting and ending in a bad financial market. First the Dotcom Crash and then the Great Recession. Perhaps he could have used a little more strategery.
The second item that pops off the chart is the number of positive return years compared to negative return years. In the 39 years between 1979 and 2017, there were 33 years of positive returns compared to only 6 years of negative returns. Over that period, in 85% of the years market returns were positive. Here is a chart with the breakdown of returns, positive and negative, by party.
Now the million dollar question for investors: What do I do with this information?
Read it and store it away.
Reread it when the newest political headlines have you worried about the state of your investments. The markets always survive, no matter which party’s in charge. If you need this pep talk while President Biden is in office, here is another interesting fact: the only presidency during which the markets went up every year of the term was that of President Obama (Biden was, of course, VP).
This analysis could be extended to control of Congress, control of the presidency and Congress, and combinations thereof and the end results would be the same to investors over that period: 85% of time the market went up over the course of the year. If you want to bet, bet that it will this year too.
Spend less than you make, invest the difference in low-cost index funds, be kind to your neighbors (red & blue ones), and you will succeed in reaching your financial goals and in making the world around you a happier place.