How the election could affect your Thrift Savings Plan returns

National elections often have economic effects. This year’s presidential election is proving a bit more volatile than we’ve seen in recent years. With what that might mean for investment returns, the Federal Drive with Tom Temin turns to certified financial planner Art Stein of Arthur Stein Financial.

Interview transcript: 

Tom Temin  This is a question you’re getting these days, huh, Art?

Art Stein  Oh, so many people ask me about the election and and what it will mean for investment returns going forward after the election. And, you know, there’s a real split. The Democrats are, you know, panicked that if President Trump wins again, that’ll be bad, and Republican clients are worried about, you know, if President Biden or some other Democrat wins, that that’ll be a disaster. And, so, you know, there have been a lot of studies on this. I look at it every four years, because people do bring it up, although not quite with the level of concern that I feel like I’m hearing now. And, basically, you know, there’s just no discernible relationship that you can come up with. And people have split the statistics a lot of different ways, Tom, but, one, investment markets do not tend to do better with either Republicans or Democrats. There’s just no statistically significant difference, and that’s partly because there just haven’t been that many presidential elections by the standards of statistical significance. The other thing is, in my opinion, that looking at what happened before World War Two, it’s just not so relevant to what’s happened since World War Two, because now the Federal Reserve is much more powerful, much more interventionist. And, you know, there’s a lot more transparency in the investment markets, a lot of things are different. But, just as an example, if we rank investment returns per year for each of the presidents since World War Two, by far the best was President Clinton. I mean, the Dow Jones averaged 16% a year. Then, we’ve got five Republicans and one Democrat who are in the 10 to 11% range per year. That’s Ford, Eisenhower, Trump, Reagan, and George H.W. Bush, and then President Biden, where its averaged 11% a year, three presidents where the market actually lost during their term, President Nixon and George W. Bush and Jimmy Carter. Market, Dow Jones all had a negative rate of return during their presidency. So, there’s just not much there to hang your hat on. One of the things a lot of this is from a firm called Bespoke Investment Group, and they really did a deep dive this time around. They looked at what would happen if you only invested when Republicans were in office, or you only invest when Democrats held the presidency. And if you just looked at it like that, then you’d be much better off only investing when the Democrats were in office. You’d have about twice as much money as only investing when Republicans were in office. But if you just stayed invested, no matter which party held the White House, you would have 30 times as much money over the period they looked at.

Tom Temin  Right, and anyway, the Republicans say if they’re doing well, it’s because of their policies. And the Democrats say if we’re doing well, it’s because of our policies. And if things happen, good or bad, sometimes they’ll blame it on the previous administration of a different party, or the party out of power will claim it’s what we did that’s helping this next guy in power, who’s of a different party. So, it’s all this gamesmanship. I guess, ultimately, what this says is that the economy itself in the investment markets are resilient, depending on what policies the administration might pose.

Art Stein  Absolutely. And, you know, the fact of the matter is, in today’s world, the Federal Reserve Board has a lot more influence over the economy than the White House and Congress. And you may think that’s a good or a bad thing, but I think that’s what’s going on. And you know, and they looked at a couple of other things. One thing that I liked was whether stock market returns 12 months before an election where there was a sitting president running an incumbent president running, did incumbent presidents, were they more likely to be elected? So, they looked at every time going back to 1900, where that was the case. And 52% of the time, if this stock market was positive before the election, the incumbent won. Well, 52% is a coin flip, you know, so what good is that? And they’re only they looked at, you know, suppose the Dow Jones decline before the election, well then the incumbent lost only 13% of the time, and the rest of it was just didn’t fit anybody’s theory.

Tom Temin  And anyway, you’re talking about percentages of small samples. I mean, there’s twenty presidents.

Art Stein  Very small samples. And you know, the extraneous things going on are so important. Wars, revolutions, COVID. I mean, it’s just, there isn’t a relationship, except that there’s a very strong relationship to just staying invested and not worrying about who gets elected president and letting that take care of it. And you know, for listeners, I’m posting a blog, and then today or tomorrow, with a lot of these charts in it, and statistics, you know, if people want to look at that, take their own look at it.

Tom Temin  We’re speaking with Art Stein of Arthur Stein Financial near us in Bethesda, Maryland. And, therefore, I’m guessing that the best advice then at this point is just leave your TSP alone, maybe make some adjustments in the funds if you feel like that. But don’t pull out because you’re afraid of Trump, don’t pull out because you’re afraid of Biden. Don’t double down for the same reason.

Art Stein  Yeah, exactly. I mean, you TSP investors need to choose an appropriate allocation between the stock funds and the bond funds. And if it’s appropriate, then they should just stick with it. And time in the market is a much better strategy than timing the market, the money that TSP investors have in the stock funds should be for long term needs, not for money they need to take out the next year or two. But for the money that, you know, someone retiring at 65 is going to need money 10, 20, 30 years in the future. And that’s where the stock funds are very likely to, you know, outperform.

Tom Temin  And I guess sometimes events can cause gyrations in the stock market. I don’t know what happened. I don’t remember when Kennedy was assassinated, President Kennedy back in 1963, or whether you know, the markets jittered in the last few days after the near assassination of candidate Trump, but those tend to be like knocking a top. It’s going to go to its natural momentum after the little shock is over.

Art Stein  Most of those, you know, there was a dip in the market after Kennedy was assassinated. And then it recovered and just kept going up. And, you know, the big event in our lifetime was 2008 when we had that massive crash in the real estate markets. I mean, that definitely had an effect. But that was an economic effect, not a political event. And things like Brexit. I don’t know if you remember, years ago. That was supposed to have a huge effect on the markets. Didn’t. You know, all these things just, and even you know, when President Trump was elected in 2016, the general feeling on Wall Street was that that would cause a market crash. Not everybody said that. But really the stuff I read was, that’s going to be a major crash if he’s elected. And what really happened was that the market had been going down until three days before the election, three trading days, then it started going up. And clearly no one knew that Trump was going to win. And it just kept going up after he got elected. I mean, so if you read anything from that, it’s just the stock market does better when there’s no election going on. And there’s a certain, there might even be a reason for that. Because, you know, they tend to say the stock market doesn’t do well with uncertainty.

Tom Temin  All right. Well, if you’re uncertain, then stick with what you’ve got going. Stay the course and you’ll probably be better off in the long run. Fair to say?

Art Stein  Fair to say, Tom.

Tom Temin  Certified financial planner Art Stein, proprietor of Arthur Stein Financial. As always, thanks so much.

Art Stein  Thank you, Tom.

Tom Temin  We’ll post this interview with federalnewsnetwork.com/federaldrive. Subscribe to the Federal Drive wherever you get your podcasts.

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