A Non-Partisan Investment Strategy Is The Most Effective Approach

Despite who is in the White House you should take note of the trend line of economic activity over the years has reflected expansionary progress. Election tensions are already simmering and it's easy to allow political leanings to affect investment decisions. The reality is that the President does not have as much sway over markets as many believe. While there are certain policies that you could argue are directly affected by presidential elections, such as energy and trade policy, a four year cycle in the scheme of investments with a decades long time horizon is rather insignificant. Presidential elections are important but from an investment perspective there is much more that goes into it.

To illustrate this point the above chart shows the performance of US large-cap equities highlighted by different presidential regimes. The takeaway is that employing a non-partisan, buy-and-hold strategy generates substantially higher returns than investing only when a Republican or Democrat was in office. Taking advantage of the volatility that election cycles generate, creates opportunities for us in the market.

It's important to remember intrinsically what a stock is. A stock is partial ownership in an operating business. Stock ownership entails several things but most importantly it gives you claim on the earnings produced by that business in perpetuity. Public stocks represent fractional ownership but fundamentally it is not different from purchasing an entire business. If you were looking to transact the entirety of a private business you would not base buy/sell decisions on who the next president is going to be. You base those decisions on price and fundamentals. The same logic applies to public stocks even though you have the ability to transact them on a daily basis.

What moves stock prices, especially in an economy as colossal as the United States, is the overall business and earnings cycle. In a $30 trillion economy that is a big ship not turned easily with legislation. Additionally, corporations are dynamic entities that are surprisingly resilient and adaptable to change, including political regimes. That dynamism is part of what makes equities the best long term investment vehicle. For bonds the interest rate cycle, which is a function of growth, is what matters. Right now earnings continue to be strong and the rate environment is still improving.

It's also critical to keep in mind as we head into the heat of election season that saying policies on the campaign trail, and enacting them through legislation are two totally different things. Our government is a complex machine and not one that many would say is conducive to enacting sweeping changes quickly. It can be argued whether that is a feature or a bug. However, in today's scenario, no matter the outcome of the presidential race they will likely be dealing with a split government. As of right now republicans are forecasted to retake a small majority in the senate due to seat openings while congress and the presidential race is a tossup. Passing legislation is hard enough with full control of government let alone a split body. Some of the proposals being floated such as taxing unrealized gains have an incredibly small chance of being enacted because of the impracticality. Making brash investment decisions on these sound bites would be a mistake.  

As we head into election season and noise continues to ramp up we will continue to focus on economic fundamentals without allowing election fever to cloud our judgement. The best long term investment strategy is owning good securities, purchased at reasonable prices, and allowing them to compound over long periods of time.

Commentary Disclosures: Covington Investment Advisors, Inc. prepared this material for informational purposes only and is not an offer or solicitation to buy or sell. The information provided is for general guidance and is not a personal recommendation for any particular investor or client and does not take into account the financial, investment or other objectives or needs of a particular investor or client. Clients and investors should consider other factors in making their investment decision while taking into account the current market environment. 

Covington Investment Advisors, Inc. uses reasonable efforts to obtain information from sources which it believes to be reliable. Any comments and opinions made in this correspondence are subject to change without notice. Past performance is no indication of future results.