In the wake of the July 13 assassination attempt on former President Donald Trump, President Joe Biden’s July 21 decision to stand down, and the rapid coronation of Vice President Kamala Harris as the Democratic nominee, the 2024 presidential election has already been tumultuous. The political news cycle will be running nonstop between now and the November election, and the outcome will have far-reaching consequences for the US and the world.
But from an investment perspective, I’d argue that it’s better to tune out the noise. Instead of attempting to answer questions that are fundamentally unanswerable, it’s critical to remain focused on the questions that really matter—those that focus on your own financial goals.
The Wrong Questions
Who will win the election, and what does it mean for my portfolio? These two questions are top of mind for many investors at the moment.
It’s easy to speculate about potential answers. For example, consider an investor who believes that Trump is more likely to be elected than Harris. In broad strokes, Trump’s agenda is likely to be more pro-business than that of any Democratic opponent, and he’d probably want to extend the Tax Cuts and Jobs Act that reduced tax rates across the board starting in 2018. Lower taxes mean more money in investors’ pockets, which would be positive for the economy and the market. Ergo, one might conclude, load up on stocks to take advantage of a likely Trump victory.
There are a few problems with this line of thinking. For one, the relative probability of a Trump victory is already reflected in the market’s prices. In aggregate, the market generally does an excellent job of adjusting to reflect known information as well as the relative probability of any unknown information.
Second, some elements of Trump’s policy agenda could have the opposite effect. Take tariffs, for example. Trump has said that he plans to enact a 10% tariff on all products imported to the United States, partly to raise funds to pay for continued tax cuts. In addition, he has proposed a 60% tariff on all goods imported from China. Adding more trade barriers might appeal to populist sentiment but would probably hurt economic growth because it would raise costs for both businesses and consumers.
Third, there are many other uncertainties that are unknowable at this point. Will the Republicans take control of the Senate as well as the House, which would make it easier to pursue a right-leaning agenda? Or will the House and Senate remain divided? And when elected officials eventually do implement regulatory changes, what form will that legislation take, and how will its provisions affect specific sectors or companies? All of these questions are impossible to answer right now.
As Barry Ritholtz has eloquently pointed out, the key problem is that nobody really knows anything. Political pundits and market strategists might have the best information in the world, but it’s impossible to predict what will actually happen and how it will affect the market. Making investment decisions based on broad, sweeping predictions that can easily be wrong is not just unwise but also dangerous. At the end of 2023, for example, market observers were widely expecting the Federal Reserve to start making a series of at least six interest-rate cuts in 2024. After a couple of inflation reports that were hotter than expected, investors are now expecting just one or two cuts in the second half of the year. The recession that many investors were predicting in late 2023 has also failed to materialize.
Preelection polling can also give an inaccurate read on election outcomes. Several major polls predicted that Hillary Rodham Clinton would win by a wide margin in 2016, and polls overstated voter support for Biden in 2020. If we can’t even predict how things will shake out at the top of the ticket, the likelihood of getting downstream investment decisions right is even lower.
What to Ask Instead
Rather than getting tripped up by predictions and speculation, I’d argue that investors should focus as much as possible on questions that can be answered. These include:
- What are my financial goals?
- When do I need to reach them?
- How much risk can I tolerate?
- Do I have an appropriate asset allocation for my goals, time horizon, and risk tolerance?
- How can I make the transition from accumulating assets to decumulation during retirement?
- Am I keeping investment costs to a minimum?
- Am I investing in a tax-efficient manner?
- Am I maximizing my overall life well-being, not just my financial well-being?
Final Thoughts
There will be plenty of pundits and market strategists opining on the elections over the next three months or so. And market volatility will probably be higher than usual as jittery investors react to headlines.
But for investors with a long-term perspective, short-term market volatility is a distraction that’s better off ignored. While the market may fare better or worse under any given president, the long-term market trajectory is almost always positive. As a result, investors who remain calm and laser-focused on their own goals will probably end up in a better place than those who attempt to shift their portfolios based on election headlines.
Read More: What Investors Should Focus on During Election Season