Politics are very relevant to our everyday lives, our quality of life, you know, conditions and everything. Again, I don't want to get political, but some of the things we deal with that are outside of financial markets, but our job here is to weigh in on things that are relevant for investor decisions. And that's where we would draw the line that, you know, you don't want to, you vote with your ballot, not with your portfolio, as David Booth says. Welcome to "The Informed Investor", the podcast that brings you research and insights to help separate the news from the noise. (upbeat music) Midterm elections are here. What should I do with my investments? Welcome to "The Informed Investor." It is a show brought to you by Dimensional Fund Advisors who is bringing financial science to investing. I'm Mark Gochnour, and I'm back in the studio with Jake DeKinder and Dr. Wes Crill. So excited to be back. I never see you guys anymore as we're all always traveling. In fact, we were joking about how the last time I saw you, we were in British Columbia of all places. You said the last time we recorded one of these in studio was like the spring. Yeah. That's way too long. It's been a while. The band is back together. A lot's happened. Yeah. A lot has happened. Good stuff. I didn't have any gray hair back then. (Jake laughs) Well, I guess that's a good time to talk elections, right? Midterm elections are coming. So let's start out with some headlines here. And the number one headline that I want to start with is I'm announcing my run for an office. You mean you, Mark Gochnour are? I'm on board, man. I'm completely on board. You're the only one voting for me. That's a big... Just kidding. Okay, here's a couple headliners. "Stocks often fade in midterm election years. Here's why." Interesting, we'll follow up on that one. Number two, "Why this year's midterm elections could really matter to the stock market." All right. Dr. Crill, let's start with you on any reaction to one of those headlines. Well, for the second one, I mean, they probably always matter, right? It's a pretty big deal of who gets into office, who's making, when it comes to legislative rules. But I think as we've seen in the past, it's just one of many things that's going to impact markets. It's funny, I was thinking back to the first time we started to do some analysis around the impact of elections on financial markets, and it happened to be the first time I did a live TV hit. I was all prepared with my notes about how there's really not been a strong relation between the performance of stock markets and who was in the White House. And this happened to be back in 2020. You guys remember that election where it kind of spilled over into the Monday afterwards because they were having trouble counting everything. And so I looked down at what was going on in markets and saw that value stocks were on a tear. It was like either the fourth or fifth biggest day ever for the US value premium. I'm like, "Oh crap, I guess there goes my story." Turned out that was the same day that one of the pharmaceutical companies had released their efficacy trial results for the COVID-19 vaccine. And it was like off the charts effective. And so that was probably the big mover for that day, but just a reminder of how it's not just what's going on with the elections. Well, and I like the headline as well. In fact, remember we were in Chicago earlier this summer and there was a financial advisor who was like, "It doesn't matter who's in the White House and it doesn't impact stock prices." And we sort of had the debate. I was like, "Wait, you don't think who the President of the United States is, or who's in control of Congress has an impact on stock prices?" And he's like, "No, I don't." I was like, "I'm sorry, I'm going to challenge you on that." I mean, just think about a fish and market hypothesis, all relevant information. I think it's definitely relevant information. The question is, does it give you additional information on what you're supposed to do with your money? And that's where I think when people make the connection, they get themselves in trouble. Yeah, and we'll get into that. So what do I do? So what do I do? As we go through some of this stuff here, because that's ultimately the question. But you guys have some data around some of these elections. I go back to the headline there about maybe during midterms, maybe it's a little bit rough year. There's some data around that. Well, that's what the data actually says. I mean, if you take the S&P back to 1926, you just look at midterm election years, you get about an average return of 7.5% in midterm election years, which is below obviously sort of the long-term average if you look at all years. So it's accurate on that. Now the year after the election, actually you get a great return. I think I've got 18.8% on average in the year following the midterm election, which quite frankly is a better question to ask as an investor versus what took place in the midterm election year. Because by the time you get to November, it's already done for the most part, like you missed most of that return. Yeah, it's probably a small sample like we always talk about, be careful sort of drawing inferences, very small sample sizes of data. But also Lord knows what else is going on during the course of those years, we got those negative outcomes. I know when you look at the actual months for midterm elections, the return's been pretty strong for the US about two or three times what they've been for just an unconditional average across all months. And so it's, you know, are there things that might move the needle and make the market react? Maybe, but the real question is, are there long lasting effects from these that are predictable? And that's probably where we would draw the line. That's a great point in terms of few number of observations. I mean, you talk all the time and expand on this if you want, but equity markets are noisy, right? We're like, "Oh, we got a hundred years of data." Oak, that's great to work with here in the US, but equity markets are really noisy. And now you only get a look at a quarter of those years for midterm election years and you're going to try to draw some inference from it? That's really tough to do. It is. Well, and you know people take a couple years of those 25 years and try to draw something from it. And I go back to your numbers. Was it 7.5%? In midterm election years now. And as an investor, I still take that as a return. I really want- That's a good reminder. But even the next year's returns, I suspect that, was it 16%? 18.8. 18? Yeah. 18%. Part of it is probably when Republicans took control. Part of it's probably when Democrats took control and part of it's probably mixed. I thought you were just going to leave it at when Republicans took control. (both laugh) I told you I was going to maneuver. I know, I'm proud of you. You got to blame somebody. Yeah. Yeah, but people do try to find patterns in very short data sets as well. You have some data too, don't you? (crosstalk) Well, and I think I like to generalize these things to just elections in general. So, you know, if you think, okay, what's maybe a bigger needle mover than the midterm elections? Well, we get a presidential election every four years, at least for now every four years. And so we've even looked back at those historically. I think what was interesting is when you look at, there've been 17 presidential terms going back to 1929 and of those 17, 14 of those terms are associated with positive returns for the US stock market. And I think that's consistent with just my premise, which would be if I'm running a business and I'm thinking about what's my objective for this business, will I want to, you know, increase my sales, I want to decrease my costs, make it as profitable as possible. I don't see what part of that proposition changes if the political party that I don't like gets into the White House. I'm not going to just throw my business away and say, "I don't want to make money anymore. I don't care about this." And so businesses will be looking for ways to make money. And if that's the case, then the stock market should be delivering returns. Regulations will change, corporate tax rates will change, unemployment will change, inflation will change. And I love Wes's point of like, look, that's what companies do. And if they don't, they go out of business. And that's okay, that's called capitalism, right? And companies go out of business all the time, but they don't sit on the sidelines and say, "For four years, I'm not going to figure out how to make money." Let's go back to one of the headlines though, which was sort of indicating, yeah, but this year's a little bit different, you know, because this year there's a lot of stuff to be concerned about. You think about the wars going on around the world. You think about, you know, potential inflation that may be coming with oil prices. You think about tariffs. You think about national debt. You know, not long ago, we got over 40 trillion national debt. What does that mean for potential future interest rates? Like there's all this stuff now that potentially, but this time makes it really, really serious in terms of midterms and what can come from that. So how do you think about something like that? I mean, this all sounds like things we've done podcasts on in the past. All these, whether economic indicators, reasons for concern for markets, the debt level. I think we even had a podcast that was specifically related to government debt. You know, look, we don't see in the data that these things have been strongly correlated with market returns that, you know, many... Belgium, for example, had a debt level, over 100% debt to GDP for almost 40 years in their history. And over that stretch of time, they had a return of 12% per year. So, you know, markets can withstand a lot of these things, mainly because it's not that markets are tuning all this stuff out. To get back to the point about do markets care about who's in the White House? Absolutely. But they're reflecting whatever the changes and expectations are in market prices. In fact, you kind of see this when you look at the winners in sectors, when you look at election months for presidential elections where, you know, the best performing sector during the election months on average outperformed the broad market by almost 7% just in that month. The worst performing sector in those election months underperformed by about six percentage points. And then you look at those same two sectors and track them during the course of that president's term, you see that on average, they were basically flat with the market, within basis points of the average market return. So that's basically telling me that if there is a change in the expectations for certain types of businesses, not going to get political here, but given whatever maybe the rhetoric is from that president, that that's going to be baked into market prices for the companies in that sector. If a certain party gets in control of Congress and they put certain policies in place that are going to benefit one sector versus another, or a president comes in and they feel strongly about tariffs, or this person's going to make decisions that are going to drive unemployment, whatever it is, that's possible, right? And you may even get that part right. The problem is even if I tell you tariffs are going to come in place, you don't know what's going to happen with the market. Even if I told you inflation's going to be X, Y, and Z, you don't know what's going to happen with the market. And again, it's just like making these leaps between here's who's in control, here's the policies, this is what's going to take place, and therefore, this is what the market's going to do. I mean, it's just so noisy. It's really hard to do. Well, I was just going to ask you about that. What if you get in a situation where taxes go back up? You know, let's just say whichever party, you know, you have midterms, you get a new president and you're like, "Yep, got to raise revenue. We got this national debt." I don't like your scenario. Taxes are going up. I don't like your scenario. What do you do? Well, there's two potential caveats here. One is, was the victor of the election completely unexpected? Like was it a 99% chance that this political party is going to lose, but they end up winning? And then is there sort of plan for whatever the tax policy changes are, is that sort of murky or is it something that's very definitive such that when that election takes place, there could be a one-time huge blip in prices. Just like you mentioned tariffs, I mean, we saw when there was an unexpected development with tariff news back in April 2025. There was a big market movement, but then it was after that where you saw really, I mean, if anything, you had strong returns for the biggest targets of the tariff policy. And so yes, you can have a one-time impact on markets, but unless you know more than the rest of the market about what those changes are going to be and what the downstream implications are, and if I'm controlling for everything else that potentially impacts market prices, there's not really much you can do about it as an investor except be diversified and hang on for the ride. You mentioned value stocks during one of the elections. I mean, we should go back to '16 when Trump first gets elected. In those eight days following the election, small caps pop a ridiculous amount, right? I mean, nobody just write articles about, "Oh, watch this. Trump's going to get elected and small cap stocks are going to take off," right? Like you just don't know. Yeah. So you're telling me what we've looked at, there's no patterns. I mean, you can't say, "Hey, we think this is..." Or, "We've seen in the data. Depending on who wins, this is what happens in markets." You see it both ways. But what you do see though is strong returns. I should say positive returns regardless. You know, over time the markets delivered very, very positive returns. You know, I go back to the headline and your data there about, yeah, the year of midterm elections may be a little bit weaker. And that goes back to the headline. It's almost like, you know, when you're watching a sports program, I was thinking about that when, you know, the announcer says, "Oh yeah, and the quarterback hasn't had an interception in like three games and then boom, next play," you know? It's almost like headline, "Yeah, be careful this year," but then this year's already been, it's been a very strong year, I think above its historical average. Global stocks are up 14.6% year to date through the end of August. So yeah, I would call that a pretty good year. With all the things that you cited of it's different, uncertainty's high, debt levels are high. War. People are concerned about X, Y, and Z, war, all of that stuff. And you're like, "Oh yeah, you got a 14% return in global markets. Should have been invested." Yeah, with all that stuff going on though, I mean, as we were talking, VIX is pretty low levels. Yeah. Yeah, the traditional markers of sort of concern over the marketplace or just over the world at large don't seem to be particularly elevated. I mean, VIX is relatively low. Even people have been talking about concerns over the fiscal situation of the US, but if you look at, you know, what we call credit default swap spread, so it's basically the market's indicator of the credit worthiness, the likelihood of the US defaulting on its sovereign debt, and it's elevated compared to where it was 10 years ago, but it hasn't really changed much over the past three or four years. And I think that's an important indicator for me because it tells me that we're not really learning much new. When markets learn something new, that's when market prices can move. But if there's not a lot of new information that's relevant to, you know, to the world at large, it's hard to see what you would be acting on. Yep. All right, so my takeaways, we don't see anything in the patterns other than markets generally deliver strong returns in the future and longer term time periods. Whatever it is you're worried about, it's out there, it's probably built into prices and of course markets build expectations of whatever policies may change depending on who gets elected in. Anything else you guys would add to that? Yeah, I got one other thing which I think is important and I like to think of it as almost this like curse of knowledge of your local market, right, which is we're here in the United States. the news about the midterm elections is right here in our face, two years from now, it'll be the presidential election. I mean, people are campaigning all the time. And you get really fired up. And quite frankly, I think as a citizen of the country, you should get really fired up. But you almost have too much information about your local market and then you let that carry over to your money. You know, you take something like a global investor. You're invested in 40 countries around the world, right? Are you following politics in all of these other countries? I mean, maybe you are, but I don't hear that argument too often, right? Now, an investor in India may say, "Yeah, I'm following local politics," and they're going to have the same concerns and think that they should make changes with their money. But it's like in your face right here in the US. So you're like, take a step back because in a big portion of your portfolio, you're not having any of these conversations. It's just that part in your local market that you're all fired up about. Yeah, I mean, politics are very relevant to our everyday lives, our quality of life, you know, conditions and everything. Again, I don't want to get political, but some of the things we deal with are outside of financial markets. But our job here is to weigh in on things that are relevant for investor decisions. And that's where we would draw the line that, you know, you vote with your ballot, not with your portfolio as David Booth says. And that's really the key here, right? You should have deep convictions about your belief system and what you want and everything else, but just separate that from how you think about money. The other one I was going to add, I was just thinking is companies figured this stuff out. Yeah. Regardless of what changes, regulatory tax, et cetera, et cetera, they kind of figure out how to stay profitable and make some money. And that's the main takeaway as an investor. Stay in the market, let the money work for you. That's right. Well, guys, thanks for a great conversation today. And it's good to be back together back doing the podcast. Great to be here. Absolutely. Nice, nice. And thanks for all of you for joining "The Informed Investor". One thing I want to remind you about, David Booth, our chairman and founder here at Dimensional was recently on the New York Times Bestseller list for his book, "Stay Calm". And I'd encourage all of you to give it a look here as we go into the elections and political season. No better time to stay calm. So thanks everybody for joining us. Have a great day. (upbeat music)