08 November 2012

After each election many doctors and dentists are concerned about what the outcome means for the future of the markets and the economy. Stories are prevalent in the media—and in clinics and operating rooms—of an investor or investment manager that made or saved a fortune because he bet on the coming economic changes. Upon hearing this, some doctors react in extreme ways. Are they right? How much is the overall stock market affected by who is elected President?

Doctor Holding Money

This is a fragile topic, and as an advisor, I’m not immune to the emotions involved with an election. When our candidate is not chosen, we have disappointment, concern, and sometimes fear. Fortunately, whoever is in office has much less of a direct impact on the market than we often think. In fact, it may surprise you to learn that multiple studies have shown that the American stock market has historically performed better when Democrats hold the presidency.

This election does have a direct impact on many issues that remain unresolved about the future. None are trivial matters. Each is a separate and distinct issue from the immediate outcome of the election. Therefore, the course of action to counteract each needs to be addressed at the individual client level—especially for higher-income doctors and dentists.

  • What will become of capital gains rates?
  • What can be done about the fiscal cliff / income tax increases scheduled to occur on January 1, 2013?
  • What will happen as a result of the healthcare taxes coming into effect in January 2013?
  • How will estate taxes be handled?

Did Your Candidate Win?

In truth, the only people who call me concerned are those disappointed by the results. If you were disheartened about the direction President Obama was advocating for our nation, you likely voted for Romney. If you voted for President Obama, you are much less likely to be seeking information about how much the market may decline as a result of your candidate’s victory.

We’d likely hear the same concerns had Governor Romney won instead of President Obama—but from a very different set of concerned clients.

How much influence does the President actually have on the market?

Leading research has gone into this very question, some conducted by Justin Wolfers, Ph.D., Associate Professor of Business Economics and Public Policy at the Wharton School of Business. Dr. Wolfers found that presidential elections actually have much less of an impact on the market than many investors suspect. He cites the best data coming from the 2004 presidential race between incumbent George Bush and Senator John Kerry. It was announced four hours prematurely that Kerry had won in a landslide. The results of Dr. Wolfers’ analysis: the market dipped slightly during this four hour “Kerry presidency,” and rebounded quickly after learning of the “Bush presidency.” In essence, the market did matter—and the market clearly preferred a Bush presidency. But the more important question is how much did it matter? Was it a 10% or 20% swing in the market during this time? No. It was approximately 1.5% to 2%, a swing that happens frequently in the markets.

In other words, the market impact of a presidential race itself has historically been quite small, and occurs when an unexpected outcome results from an election. Those on the losing side often reduce their consumption of goods temporarily due to fear. Dr. Erik Snowberg, of Caltech, MIT and Stanford, contends that Americans think the President matters a lot more than academic research would suggest. He says it is like rooting for a sports team. When our team doesn’t win the big game, we get upset. Those on the losing side reduce their spending between 4-8% for a while, but soon we are back to spending like normal. Dr. Snowberg suggests that this reduction in spending by the disappointed side doesn’t play out in terms of an impact on the larger economy.

What if I’m still concerned?

The news about the President’s impact is good news, right? But, what if as a high-income physician you are still concerned how you can protect yourself and your family?

  1. Upcoming posts will address specific strategies for many of these unresolved issues. Check our webpage often for this content.
  2. A market decline is a good thing if you are young and still adding significant funds to the market. This gives you the opportunity to buy in at a lower price.
  3. If you are not so young, this is a great time to put a safety-net in place for your portfolio. You can accomplish this in multiple ways, but the essence of any safety-net strategy is to reduce your risk. That way, if there is a large market decline (whether caused by the President or not), you can have more peace of mind. Connect with your advisor to discuss these strategies.
  4. Many physicians are taking on more market risk than they should. The level of risk in your portfolio should be commensurate with your goals for the future, not with cookie-cutter advice based on your age, or current market trends.

By Tom Martin, CFP®, CPWA®, AIF®
Author and Partner at Larson Financial Group

Larson Financial Group, LLC, Larson Financial Securities, LLC and their representatives do not provide tax advice or services. Please consult the appropriate professional regarding your tax planning needs.