Keith Lerner, chief market strategist at Truist, believes Washington’s influence on market returns may be overstated.
The U.S. is going through a turbulent presidential election season, and you may be adjusting your portfolio amid uncertainty in Washington.
After all, a win by former President Donald Trump would likely boost traditional energy stocks in the short term. A Democratic victory would mean a boost for the electric vehicle industry and infrastructure stocks. Who wants to leave money on the table?
But there are good reasons to stay on the sidelines. Your strategy will depend largely on whether you consider yourself a trader or an investor.
The trading game is tough. Every millisecond counts, tiny price differences can result in huge profits, and every major firm has a Bloomberg terminal that costs $20,000 or more per user per year.
If your goal is to become an independent full-time day trader, you are already at a disadvantage to the likes of Jane Street, which always have access to more information faster. You may hit the jackpot once in a while, but you also run the risk of going broke.
But if your goal is to be an investor — someone focused on generating long-term returns on milestones like a home or a child’s college education — then don’t let the election cycle distract you, no matter how important it is.
Keith Lerner, chief market strategist at Truist, cautioned that investor sentiment is often high during election years as they look to infer the impact of the election on their portfolios. "The impact of Washington on market returns is likely exaggerated and should not be viewed in isolation," Lerner wrote.
Lerner wrote that under the past three presidents, the S&P 500's annualized returns have ranged from 12% to 15%, despite significant differences in policy agendas. Other important factors include valuation, business cycle and earnings.
For decades, academic researchers have assured investors that staying in the market is the best outcome, regardless of political outcomes and analyst forecasts, by investing small, regular amounts in low-cost index funds that offer diversification.
The latest evidence comes from Hendrik Bessembinder, a finance professor at Arizona State University, who published research this month showing that if investors adopted a buy-and-hold strategy between December 1925 and 2023, reinvesting every dividend in the same U.S. stock, they would have earned the equivalent of $229.40 for every $1 invested.
Of course, most investors don't stay in the market for a century, and the same is true for stocks, which tend to be delisted over time due to mergers or performance issues. But even stocks with a history of more than 5 years but less than 20 years have an average cumulative return of 194%. This is known as the power of compound interest.
To be sure, most U.S. stocks have had below-average returns. In fact, 52% of stocks have had negative cumulative returns.
“So if you just randomly pick a few stocks, the odds are stacked against you,” and you’re likely to perform below average, Besenbinder said. But there’s a chance that investors will stumble into picking one or a few big winners, he said. Regardless, the possibility is enough to motivate some investors to become stock pickers.
That’s the bottom line for picking stocks based on a Trump 2.0 strategy or other election outcomes. They may grab headlines and attract short-term traders, but the gains from low-cost bonds or stock index funds have quietly led investors to achieve their financial goals.
Article forwarded from: Jinshi Data
