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Could White House Drama Derail Your Portfolio?

Will the political storm for the current presidential administration ultimately impact investors?

Client Conversations gives financial advisors an easy way to communicate with clients on topics influencing financial markets; it highlights common investor behaviors and offers ways to address the challenges investors face. Share this article with your clients, and remember to follow your firm's policies that govern sharing content with clients and prospects.

Client Conversations gives financial advisors an easy way to communicate with clients on topics influencing financial markets; it highlights common investor behaviors and offers ways to address the challenges investors face. Share this article with your clients, and remember to follow your firm's policies that govern sharing content with clients and prospects.



Whether it’s probes into election interference, discussions of impeachment, or 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 somewhere in between, what’s going on in Washington D.C. right now has put many 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 the 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 by 0.8% at the market close.1

When articles of impeachment were issued for Nixon on July 27, 1974, the S&P 500 Index 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.

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, which led to gas prices skyrocketing. Inflation was rampant.2 The stock market eventually found its footing, and rebounded to pre-crisis numbers within a year after the president’s resignation (Figure 1). 

During the Clinton crisis, the market of the late 1990s was on the rise (Figure 2). 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 dot-coms hurt investments much more than the fallout from the president’s actions did.  

 

FIGURE 1

Nixon Crisis

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Source: Yahoo! Finance. The S&P 500 Index is a market capitalization-weighted price index composed of 500 widely held common stocks. Red, purple, and green lines show the percent change for the S&P 500 Index before, during, and after the presidential impeachment process.  Past performance does not guarantee future results. Indices are unmanaged and not available for direct investment. 

 

Figure 2

Clinton Crisis

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Source: Yahoo! Finance

 

Does the US stock market have a commander in chief?

From the day after the 2016 presidential election through September 30, 2019, the cumulative return for the S&P 500 Index was a gain of 47%, the Dow Jones Industrial Average gained 57%, and the NASDAQ composite rose 59%.4 Those 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 a global bull market that keeps chugging along because other factors are more important. 

Outside factors—beyond politics—often have a greater sway on the performance of markets than the person behind the desk in the Oval Office. The release of the latest iPhone from Apple potentially could move the needle on the equity market more than the ongoing investigation of the president. 

 

Several of the other underlying factors that govern the stock market

1. Company/business profitability
Increased demand for goods and services boosts company profits and, ultimately, stock prices.

2. Interest rates
Low interest rates help to boost economic growth and can help make firms more profitable, helping stocks look more attractive than saving money in a low-yielding savings account.

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 to be 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 to 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.

 



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1 Yahoo! Finance

Fortune, “The Two Numbers Wall Street Is Watching When It Comes to Impeachment” 9/26/2019

Investopedia, “The Post-Soviet Union Russian Economy” 6/25/19

Morningstar, 10/19

 

Important Risks: Investing involves risk, including the possible loss of principal. • Fixed income security risks include credit, liquidity, call, duration, and interest-rate risk. As interest rates rise, bond prices generally fall. 

This information does not take into account the specific investment objectives, tax and financial condition of any specific person. This information has been prepared from sources believed reliable but the accuracy and completeness of the information cannot be guaranteed. This material and/or its contents are current at the time of writing and are subject to change without notice. This material may not be copied, photocopied or duplicated in any form or distributed in whole or in part, for any purpose, without the express written consent of Hartford Funds.

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