You remember this?
As in the one that just happened?
No, no. We avoided that …for the time being.
So, are you talking about the one in at the end of 2018?
Nope, not that one either.
Okay so the one in early 2018?
Check the time stamp on the headline…
Ah okay, I actually do remember that one.
What did you think at the time?
That was when government shutdowns were still a big deal. Though I was a 20-year-old college kid, I do remember being surprised that the government could plainly close up shop. I wasn’t even aware that was a possibility.
And how did you think the markets were going to react at the time?
I was more concerned how my intestines would react to the burrito, waffles, and ice cream lunch I just had at 2:30 p.m.
Can’t fault you for that. But what is your guess on how the S&P performed during the 2013 lockdown (September 30-October 17)?
I will say the market fell 4%.
The market gained 3%. Then it rose 6% through mid-January of the following year. Look at the market’s performance during government shutdowns dating back to 1976:
So, it’s a mixed bag of returns?
Exactly. As frustrating as it is for us to watch the Washington tire fire, the market has mostly taken it in stride.
What about other political messes? Has the market been as forgiving?
Good question. Let’s take a look at Watergate, for example. Here’s the first Woodward and Bernstein article from August 1, 1972:
And this went to the summer of 1974?
Right. To be exact, Nixon’s resignation took place on August 8, 1974.
How’d the market do over those 2+ years?
Not so hot. The S&P lost 25% and the Dow lost 16%.
Yeesh. How about the Clinton-Lewinsky scandal?
Let’s do it. The story hit the mainstream with this Washington Post headline on January 21, 1998:
The market take a digger just like the Watergate days?
Not quite. From the date of this story until Clinton’s acquittal on February 12, 1999, the S&P rose 28%. The NASDAQ, in full dot-com hysteria, climbed 46%.
The opposite of Watergate times? Interesting. Let’s do one last one; something a bit more modern like the January 6 Capitol riot. Remind us of the market’s returns then.
Oddly, that day the Dow gained nearly 500 points and the S&P gained almost a percentage point.
That’ll never make sense to me.
Me either. The market finished that quarter up 6% and hasn’t looked back.
So, I guess it’s fair to say politics has no effect on the stock market?
I think that’s a bridge too far. Policy changes can have an impact on American companies and the economy at large. This impact can be positive or negative for a corporation and their corresponding stock performance.
Do you think you could make portfolio adjustments based on policy changes?
I wouldn’t. Even if you predict the market’s reaction to a political event, the effect may be seen in several years. It may also not be as consequential as you forecasted.
I’d be remiss if I didn’t bring up the Fed. What’s your take on that?
The President appoints the Fed Chair, and it is certainly not at random. The Federal Reserve is an independent body, but clearly the President has an agenda with this appointment.
Agreed. So, in the end, how should we view politics in relation to the market and our portfolio?
Don’t let politics eat up a lot of mindshare. That’s easier said than done these days but it’s sound advice. Events and policies out of Washington play a role but it is a single variable out of many. A financial plan that leads with politics will get you into big trouble.