Election and Economy

Even in December 2015, reputable sources such as the Wall Street Journal and the Brookings Institute were publishing articles about how the 2016 election may be the most important of our lifetime. The New York Times claims there is “much more at stake in November than control of the Supreme Court” and questions about the impact of this election on financial plans have been a common topic in client meetings recently.

While we all have our own political beliefs and ideologies, at DV Financial we concern ourselves only with the long term financial impact of events, including elections. Typically, the longer your outlook, the less impact any event seems to have. In the long run, this election will likely have little financial impact too. Of course there will always be downturns and volatility. Since the S&P 500 reached a low of 677 on March 9, 2009 we have seen it rise more than 220%, but short term events have caused 7 pullbacks along the way. Y, as in the past, we have recovered from each and every one of them.

Source: Fact Set, Standard & Poor’s, J.P. Morgan Asset Management; (Bottom) CBOE

Is this election important?
Maybe. Probably. Since I am not a political pundit I doubt my opinion on this topic matters.

What long term impact will this election have on investments and financial plans?
In my opinion, none to very little.

In his 2016 letter to shareholders, Warren Buffet wrote:

It’s an election year, and candidates can’t stop speaking about our country’s problems (which, of course, only they can solve). As a result of this negative drumbeat, many Americans now believe that their children will not live as well as they themselves do.

That view is dead wrong: The babies being born in America today are the luckiest crop in history.

American GDP per capita is now about $56,000. As I mentioned last year that – in real terms – is a staggering six times the amount in 1930, the year I was born, a leap far beyond the wildest dreams of my parents or their contemporaries. U.S. citizens are not intrinsically more intelligent today, nor do they work harder than did Americans in 1930. Rather, they work far more efficiently and thereby produce far more. This all-powerful trend is certain to continue: America’s economic magic remains alive and well.

Some commentators bemoan our current 2% per year growth in real GDP – and, yes, we would all like to see a higher rate. But let’s do some simple math using the much-lamented 2% figure. That rate, we will see, delivers astounding gains.

America’s population is growing about .8% per year (.5% from births minus deaths and .3% from net migration). Thus 2% of overall growth produces about 1.2% of per capita growth. That may not sound impressive. But in a single generation of, say, 25 years, that rate of growth leads to a gain of 34.4% in real GDP per capita. (Compounding’s effects produce the excess over the percentage that would result by simply multiplying 25 x 1.2%.) In turn, that 34.4% gain will produce a staggering $19,000 increase in real GDP per capita for the next generation. Were that to be distributed equally, the gain would be $76,000 annually for a family of four. Today’s politicians need not shed tears for tomorrow’s children.

Indeed, most of today’s children are doing well. All families in my upper middle-class neighborhood regularly enjoy a living standard better than that achieved by John D. Rockefeller Sr. at the time of my birth. His unparalleled fortune couldn’t buy what we now take for granted, whether the field is – to name just a few – transportation, entertainment, communication or medical services. Rockefeller certainly had power and fame; he could not, however, live as well as my neighbors now do.

Though the pie to be shared by the next generation will be far larger than today’s, how it will be divided will remain fiercely contentious. Just as is now the case, there will be struggles for the increased output of goods and services between those people in their productive years and retirees, between the healthy and the infirm, between the inheritors and the Horatio Algers, between investors and workers and, in particular, between those with talents that are valued highly by the marketplace and the equally decent hard-working Americans who lack the skills the market prizes. Clashes of that sort have forever been with us – and will forever continue. Congress will be the battlefield; money and votes will be the weapons. Lobbying will remain a growth industry.

The good news, however, is that even members of the “losing” sides will almost certainly enjoy – as they should – far more goods and services in the future than they have in the past. The quality of their increased bounty will also dramatically improve. Nothing rivals the market system in producing what people want – nor, even more so, in delivering what people don’t yet know they want. My parents, when young, could not envision a television set, nor did I, in my 50s, think I needed a personal computer. Both products, once people saw what they could do, quickly revolutionized their lives. I now spend ten hours a week playing bridge online. And, as I write this letter, “search” is invaluable to me. (I’m not ready for Tinder, however.)

For 240 years it’s been a terrible mistake to bet against America, and now is no time to start. America’s golden goose of commerce and innovation will continue to lay more and larger eggs. America’s social security promises will be honored and perhaps made more generous. And, yes, America’s kids will live far better than their parents did.

So as your Facebook feed continues to fill with political news, warnings, and disgust, remember that it is all part of the great American political process. Regardless of who resides at 1600 Pennsylvania Avenue, you can relax. America is strong and resilient, just as it has been all along.

Photo american-flag-3788bf by From Sovereign to Serf – Roger Sayles