Nick Stewart: Elections and markets, any correlation?

The outcome of elections do not affect the upward trend of stocks over time, writs Nick Stewart.

It’s that time again; election 2023 is here. We, the people, have the chance to vote for who we want to lead our country – namely, who will steer the ship while we navigate out of the current stormy waters.

In financial circles, we will almost certainly hear perceptions and views of market impacts. But do election results really matter and need to be followed closely by long-term investors, or is it just noise that needs to be ignored?

Perhaps it seems logical that who you vote for would have an impact on your investment returns by influencing markets. To put your mind at ease ... the outcome of elections do not affect the upward trend of stocks over time. Research from Dimensional Fund Advisors shows that while US presidents may have an impact on market returns, so do thousands of other factors. And as regular readers of this column will know, a globally diversified portfolio will not be brought down by the economics of one locality’s administration.

We have had much tumult since the last election in 2020. The lingering impacts of Covid, extreme weather events costing millions in damage, changes in interest rates, fluctuating oil prices, new wars creating trading barriers, technological advances, and a few crashes in trendy stocks (like the recent collapse of NFTs/digital assets, which rose to popularity in 2021 and have declined as people returned to ‘real world’ pursuits), it can feel like the past three years have been more like a decade sometimes with the amount of local and global events packed into them.

And now, we’re here again – voting ballots at the ready.

There’s nothing wrong with supporting a candidate or a party to win, but investors can run into trouble when they place too much importance on election results. That is because evidence suggests elections have, historically, made no difference when it comes to long-term investment returns.

What should matter more to investors is staying invested. Although past results are not predictive of future returns, a NZ$1 investment in the S&P 500 made when George H. W. Bush took office in 1989 would have been worth NZ$27 today, using the average annualised return from 1957-2022 being reported 10.15 per cent. During this time there have been three Republican and three Democratic presidents (including Bush’s aforementioned presidency).

All things considered, the split in political ideology of various presidencies has not made investors worse off over time. The historical return differential between administrations is virtually non-existent. Additionally, according to Vanguard research dating back to 1860, there is “no evidence of higher equity volatility in election years and no relationship between asset returns in election and non-election years”.

Elections and market volatility have no proven correlation – in fact, there’s plenty of research showing the opposite. And even if there were, in some hypothetical world … a good financial plan will take volatility into account. There is no timing the markets. This is why investors need to share the risk over different countries, industries and asset classes, and consider that while there may be short term pain – history shows that long term investors will win out in the end.

When you are thinking of the upcoming election and casting your vote, you do not need to be worried about how it will impact your investments. You can be solely focused on exercising your democratic right.

In MMP, parties are akin to the ingredients to bake a cake. The electoral process takes those ingredients and sets them together into the final product. There is no way to know if the public will enjoy the cake when it’s ready; with MMP you get a mix of flavours based on how many seats each party gets, regardless of who (or as it will likely be this year, which coalition) ends up with majority vote.

And if in time the ingredients don’t mix, then it’s back to the mixing bowl for another round of elections. We have not seen this occur in God’s own yet, but remember not every cake is sure to rise.

Irrespective of the palatability of our party cake… invest globally, live locally, go about your day, and be sure to exercise your right to vote. Your opinion may only be one in five million, but every one counts (literally) in an election.

If you would like more information about voting, visit vote.nz or look up your local MPs. If you would like to learn more about become a global investor, or get a second opinion on your financial plan, contact your local trusted fiduciary for a chat.

· Nick Stewart (Ngāi Tahu, Ngāti Huirapa, Ngāti Māmoe, Ngāti Waitaha) is a Financial Adviser and CEO at Stewart Group, a Hawke’s Bay-based CEFEX & BCorp certified financial planning and advisory firm. Stewart Group provides personal fiduciary services, Wealth Management, Risk Insurance & KiwiSaver scheme solutions. Article no. 325.