Why Long-Term Investors Should Ignore the Midterms

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About the author: Isabel Barrow is director, financial planning at Edelman Financial Engines.

We’re on the cusp of the 2022 midterm elections. This cornerstone of our democracy can generate excitement, apprehension, and a mix of many emotions for Americans—even more so it seems in recent years. 

Adding to the anxiety of these midterms is the fact that they are taking place in a highly complex and challenging economic environment. Inflation is at a 40-year high, coupled with rising interest rates and a bear market throughout the first half of 2022. As a result, many people are left wondering what adjustments they should make to their portfolios before or after the election, depending on the outcome. 

If this sounds like you, it might be worth pausing and putting your politics to the side before making hasty investment decisions. Here’s why.

Successful portfolios can be built by adhering to long-term strategies; sudden market changes and political pundits should not guide them. It’s generally unwise to try timing the markets or positioning your investments based purely on an election and whether or not your desired candidate is in office.

More often than not, Congress and the White House are split between parties, making it difficult for either political party or candidate to deliver on campaign promises and legislative initiatives. Despite the candidates’ spin, history repeatedly reveals that long-term market performance doesn’t vary significantly under either Democratic- or Republican-controlled governments. 

To explore this further, Edelman Financial Engines looked at how the

S&P 500
performed under different administrations and political parties between 1948 and 2021. We analyzed data according to the eight possible combinations of control that could have occurred in the White House and two houses of Congress during this period.  

Here’s what the analysis found: No political party substantially impacted long-term market returns. For example, when Democrats controlled the White House, the House and the Senate, the S&P 500 produced an average annual return of 15.1%. Under Republicans, it was 15.9%. The following chart shows the six relevant combinations and results. (For purposes of the analysis, two scenarios were discounted—one that never occurred and one that we viewed as not statistically significant.)

% Of Time Occured	Number of Years	White House	U.S. House or Representatives	U.S. Senate	Average Annual Return
11%	8	Republican	Republican	Republican	+15.9%
3	2	Republican	Republican	Democrat	-16.9
11	8	Republican	Democrat	Republican	+17.9
30	22	Republican	Democrat	Democrat	+8.5
28	21	Democrat	Democrat	Democrat	+15.1
0	0	Democrat	Democrat	Republican	N/A
5	4	Democrat	Republican	Democrat	+15.9
12	9	Democrat	Republican	Republican	+16.9

Sources: Bloomberg, Library of Congress, Senate.gov, House.history.gov

The research also looked at how the S&P 500 performed during the total time each party was in the White House. For example, $100,000 in 1948 would have grown to almost $834,000 by the end of 2021 if invested when only a Republican was president, and to $3.7 million if invested when only a Democrat was in office.  However, if it was invested the entire time, that money could have grown to nearly $31.2 million.

The takeaway from all this is simply that money isn’t red or blue—it’s green.  It’s more important to stay broadly invested, to strategically rebalance your account, and to be focused on the long term, regardless of an election’s outcome.

Politics are an inherently emotional game. But emotions often cloud us from making the right investment decisions. This can be an even greater challenge in a volatile market environment. What’s essential to keep in mind is that no outcome of this year’s midterm elections will hurt your portfolio more than your own impulsive behavior. This is why working with a trusted financial professional can be especially valuable—he or she can work with you to create a personalized plan and help you stay on course through these periods of uncertainty. 

The economy drives the markets long-term, not elections. In time, the economy and the markets should recover. Regardless of which political party is in office, don’t make short-term reactions based on elections.  Rather, keep your eye focused on your long-term goals and make sure to separate fact from fiction when it comes to elections and your portfolio. 

Guest commentaries like this one are written by authors outside the Barron’s and MarketWatch newsroom. They reflect the perspective and opinions of the authors. Submit commentary proposals and other feedback to ideas@barrons.com