Client Conversations: Could White House Drama Derail Your Portfolio?
Controversy in the White House and the performance of the stock market have historically shown few observable connections.
Probes into possible election interference. Active FBI investigations. Heated congressional hearings.
The daily drama revolving around the White House seems to produce a never-ending barrage of headlines. We can all debate the validity of the accusations. Whether you consider yourself red or blue or fall somewhere in between, what’s going on in Washington D.C. right now has put some Americans on edge.
For those investors, the question could be, “Will the political storm for the current presidential administration ultimately impact us if the investigations take a turn for the worse?”
From Watergate to Whitewater
Major controversy in the White House and the performance of the stock market have historically shown few observable connections. What goes on in the president’s world impacts your investments a whole lot less than you may think.
Looking back at two modern examples of major controversies—Watergate and the Whitewater/Lewinsky scandal—that sitting presidents found themselves facing, each event had less impact on the stock market than other factors. In fact, the market performed with little correlation to what was occurring on the days when news first broke.
The day word of President Richard Nixon’s possible connection with the Watergate break in hit the front page of The Washington Post on October 10, 1972, the S&P 500 Index rose 0.8%.1 When reports first broke about the alleged relationship between President Bill Clinton and Monica Lewinsky on January 21, 1998, the Index went the other direction: It dropped 0.8% at market close.1
When articles of impeachment were issued for Nixon on July 27, 1974, the S&P dropped 1.77%.1 However, it rose 1.25% on the day Clinton was hit with two impeachment counts of his own on December 19, 1998.1
The crises of presidents are just one of the underlying drivers of the economy. Watergate wasn’t the only thing potentially impacting the economy during that time. The Middle East had erupted in major conflict. The oil crisis led to gas prices quadrupling. Inflation hit 12.2%.2 The stock market eventually found its footing and within a year after the president resigned rebounded to pre-crisis numbers.
FIGURE 1: Nixon Crisis
During the Clinton crisis, the market of the late 1990s was on the rise. It took a few dips as the investigation unfolded, but other events, such as the Russian financial crisis, were contributors to those declines.3 Ultimately, the market moved up steadily until the tech bubble burst in 2000. Excessive speculation in dotcoms hurt investments much more than the fallout from the president’s actions did.
FIGURE 2: Clinton Crisis
Does the stock market have a commander in chief?
From the day after the election through June 30, 2017, the S&P 500 Index was up more than 14%, the Dow Jones industrial average gained 18%, and the NASDAQ composite rose 19%.4 Those three positive gains in market value may be a sign that things will continue to perform well in spite of all the turmoil around us.
It could be argued that business-friendly White House policies helped encourage those positive numbers. It could also be said that the ongoing controversies we’ve seen have simply not made a dent on an eight-year global bull market that keeps chugging along because other factors are equally important.
Outside factors—beyond politics—often have a greater sway on the performance of markets than what the person behind that desk in the Oval Office does. The release of the latest iPhone from Apple potentially could move the needle on equity market more than the ongoing investigation of the president.
FIGURE 3: Underlying factors that govern the stock market5
1. Company/business profitability
Increased demand for goods and services boost company profits and,
ultimately, stock prices.
2. Interest rates
Low interest rates help to boost economic growth and can help make firms
more profitable, and helping stocks look more attractive than saving
money in a bank or holding bonds.
3. Investor confidence & expectations
We’re driven by emotion. When the going is good, so are we. But when
markets fall, we often follow suit and exit.
4. Global markets
Stocks can benefit when investors consider them more attractive relative to
bonds or other investments.
Don’t let politics wreak havoc on your portfolio
Presidents have priorities and agendas with a four-year vision. We the people, on the other hand, may have a different time table. There are many influences on your portfolio beyond the president. For those concerned about the news, don’t allow what’s currently going on in Washington potentially derail your portfolio from your long-term goals.
Those who panic run the risk of sabotaging their long-term financial dreams. If you have concerns, speak with your financial advisor about how best to proceed.
2Money, “Here’s What Happened to Stocks During Watergate and Other White House Scandals,” 5/18/17
3CFA Institute, “Russian Bond Default/Ruble Collapse,” 5/5/16
5Economics Help, “10 Factors Affecting the Stock Market,” 5/4/12
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