Stock Market and Presidential Elections: Historical Returns and Investing in Your Beliefs
The performance of the S&P 500, a key barometer of the U.S. stock market, has long been a topic of interest, especially in relation to the political party in power. Over the past 50 years, the S&P 500 has shown varied performance under Republican and Democratic administrations.
Historical Performance
Since its inception in 1957, the S&P 500 has achieved an average compound annual growth rate (CAGR) of approximately 9.8% under Democratic presidents and about 6% under Republican presidents. However, the median CAGR tells a slightly different story, with the index achieving 8.9% under Democrats and 10.2% under Republicans. This indicates that while Democrats have generally seen higher average returns, Republicans have had more consistent median returns.
It’s important to note that these figures can be influenced by various factors beyond presidential policies, such as global economic conditions, technological advancements, and significant geopolitical events. For instance, the dot-com bubble, the Great Recession, and the COVID-19 pandemic had profound impacts on the stock market, independent of the party in power.
Avoiding Rash Investment Decisions
In times of political change or market volatility, it’s crucial for investors to refrain from making rash decisions based on short-term events or emotions. Reacting impulsively to political news can lead to suboptimal investment choices and potential financial losses. Instead, investors should focus on long-term strategies that align with their financial goals and values. This is where direct indexing can be particularly beneficial, allowing investors to customize their portfolios to exclude investments that do not align with their beliefs.
Understanding Direct Indexing
Direct indexing is an investment strategy that allows investors to purchase the individual stocks that make up an index, rather than buying a mutual fund or exchange-traded fund (ETF) that tracks the index. This approach offers several benefits, including tax optimization and the ability to customize the portfolio to align with personal values or preferences.
Benefits of Direct Indexing
- Tax Optimization: Investors can harvest tax losses by selling underperforming stocks to offset gains, potentially reducing their overall tax liability.
- Customization: Direct indexing allows investors to exclude specific stocks or sectors they do not wish to support, tailoring their portfolio to their ethical or political beliefs. Please note, direct indexing can be more expensive than other investment strategies, such as index funds and ETFs, due to higher management fees and minimum investment amounts.
Excluding Stocks with Direct Indexing: A Practical Example
Consider the case of investors who are upset about Elon Musk’s public support for Donald Trump. These investors might prefer not to invest in Tesla, a company led by Musk. With direct indexing, they can exclude Tesla from their portfolio while still investing in other companies within the S&P 500. This level of customization is not possible with traditional index funds, ETFs, or mutual funds, where investors cannot choose which companies to avoid. This customization can apply to both sides of the political spectrum, allowing investors to avoid companies whose practices or leadership they disagree with.
For example, an investor who disagrees with certain environmental policies might choose to exclude fossil fuel companies from their portfolio. Conversely, another investor might exclude companies that do not align with their social values.
Conclusion
The performance of the S&P 500 under different political administrations shows that while there are differences, the overall trend is one of growth over the long term. Direct indexing offers a powerful tool for investors to align their portfolios with their personal values, potentially providing both financial and ethical satisfaction. By leveraging this strategy, investors can take control of their investments in a way that reflects their beliefs and preferences.
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1: The Motley Fool, “Here’s the Average Stock Market Return Under Democratic and Republican Presidents” (2024).
The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. An investment in these strategies is subject to market risk and an investor may experience loss of principal. Investments that utilize a direct indexing strategy carry specific risks that investors should consider before implementing a direct indexing strategy. In certain market conditions, direct indexing investment strategies may lose value or underperform passive strategies. Direct indexing strategies have the risk of not closely tracking the performance of the underlying index they seek to replicate. While these strategies are designed to track an index, passive investments often do not consider a company’s profitability, financial health, or growth potential in their investment selection criteria.
The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. Past performance does not guarantee future results. Raymond James does not provide tax or legal services.
