Hey Reader,

President Joe Biden delivered a fiery 2024 State of the Union address on Thursday, but the markets finished lower after a session of wobbly trading on Friday.

Are those two events related? Perhaps a bit. But not nearly as much as a lot of people think they are.

While the stock market can be extremely reactionary to major financial, economic, and political events, it's not always as simple as "stocks did X because Y happened." And that line is especially blurry as it pertains to politics, which is exceedingly important to how you and I live on Main Street … but isn't always a needle-mover on Wall Street.

The Tea: As mentioned above, President Biden delivered his third SOTU address on Thursday—an energetic and wide-ranging speech in which he discussed the myriad issues our country faces today, and set the stage for his likely November electoral rematch against former President Donald Trump.

As is common in SOTUs, President Biden pitched several policy ideas, including tax credits for homebuyers (and some homesellers), the responsible and safe development for artificial intelligence (AI), increase the number of drugs for which Medicare can negotiate prices, and higher taxes on the wealthy.

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A little inside baseball: Shortly after an event that financial experts deem influential to publicly traded securities, we're typically contacted by a bevy of market strategists, fund managers, and other people in the know wanting to discuss why and how what just happened matters.

As of early Friday morning, we'd heard crickets.

Over the course of a few hours, however, our inbox started to fill up—not with commentary about Biden's speech, but instead with thoughts on the February nonfarm payrolls report, released at 8:30 a.m. Friday, and what it says about our current economic situation, how it could impact markets, and what it means for the possibility of Federal Reserve rate cuts later this year.

Weird, right?

Well … not really.

Politics can and does impact how publicly traded companies do business, and stock prices will often reflect that. But the extent to which politics affects stocks is often overestimated, is far more complex than people realize, and sometimes only can be felt in certain slivers of the public markets.

The Take: To help our readers understand this dynamic a little better, we talked with Kelly Bogdanova, vice president and portfolio analyst at RBC Wealth Management U.S., who says "the market's strength has little to do with who or which party occupies the White House" and has just published a report on how U.S. elections do (and do not) impact markets.

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Bogdanova's advice, as far as portfolios are concerned, is to be less concerned with who's in control in Washington, and instead keep your focused fixed on these four principles that have guided the financial markets for decades:

#1: The market has performed well under various combinations of party control.

"The stock market has experienced growth under both Republican and Democratic administrations, regardless of whether the presidencies were controversial or not," Bogdanova says. "Although there were challenging periods, such as during the 1970s under Presidents Nixon, Ford, and Carter, the overall trajectory of the market has been upward during the tenures of various presidents from both parties."

As you can see from the RBC chart below, having a Democratic president has been on aggregate better for stocks overall, but past that, there are no real other patterns. For instance, while power splits in Washington have been stock-market rocket fuel under Democratic presidents, equities under Republican presidents have done their best when the GOP has full control.

#2: Wall Street's priorities often differ from Main Street's.

Bogdanova says that "Wall Street's priorities can differ from what large portions of the electorate prioritize."

As a big for-instance, massive social issues—which can be pivotal to determining the actual outcome of presidential and down-ticket races—often fail to even register on Wall Street's radar.

Instead, Wall Street tends to prioritize domestic economic policy, foreign policy, and sector- and industry-specific industries. RBC Wealth Management provides a few dozen possible elections that could influence slices of Wall Street or the market as a whole, ranging from student loan debt and Treasury appointments to green initiatives and health care policy.

That said, some issues likely will end up having either a broader or deeper impact on equities. Bogdanova says this election cycle, RBC believes three issues will stand out most: tax rates on individuals, tariff and trade policies, and the adversarial U.S.-China relationship.

"There will likely be a lot of focus on individual tax rates as the presidential campaign heats up, and also in Senate and House races," she says. "And I expect there will be a vigorous debate about tax policy when the next presidential and Congressional terms begin in 2025."

"Foreign policy issues that focus on trade relations and the U.S.-China rivalry seem more important to Wall Street this election than in recent ones. This is because tariffs, trade barriers, and economic sanctions policies have played greater and greater roles in the current and previous two presidential administrations. This will likely continue regardless of who is elected president in 2024. This is because trade restrictions and sanctions, rather than good old-fashioned diplomacy, have become fixations of the U.S. foreign policy establishment—even though they quite often don't work."

#3: The Fed, the economy, innovation and profits tend to matter more than Washington policies.

The U.S., at an estimated $28 trillion, is the world's largest economy. And you'd think the relative handful of people voted in to determine the country's direction would have the most direct say over that economy's fate.

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However, the greatest impact they have is indirect—selecting (in the case of the president) and vetting and confirming (in the case of the Senate) the people who serve on the board of America's central bank.

"The influence of political developments at the White House and on Capitol Hill is considered minimal compared to the impact of the Federal Reserve's monetary policies," Bogdanova says. "These policies significantly affect the economy, inflation, bank lending, and credit availability, thereby shaping the business cycle and influencing corporate profit growth, crucial for stock market performance. Additionally, Fed policies play a key role in determining U.S. bond market outcomes and influence other developed market central banks."

Other factors that are largely out of Washington's control—such as technological innovation and the cyclical nature of economic activity—are other massive influences on the stock market's direction.

#4: Historical election data are useful to consider, but there are caveats.

Nearly a century's worth of data illustrates pretty clear patterns across the four-year presidential-term cycle … but the "why" is elusive.

As you can see above, the S&P 500's strongest performance has come in a president's third year, followed by election years, then first years, with midterm years in the gutter.

Bogdanova notes that there are several theories as to why, related to changes in federal spending and Fed policy patterns, "but there's no definitive explanation for why this pattern persists."

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There are even patterns within each year—most strikingly, within election years, where "market gains are commonly seen in the summer and later parts of the year, suggesting a cyclical influence on stock market performance related to presidential terms."

But they're merely patterns—not rigid train tracks the market must follow every time.

Consider the 2000 elections, which pitted George W. Bush against Al Gore. Yes, the market showed weakness amid Florida's "hanging chads" recount controversy that delayed the election's final results by a month.

From Bogdanova's report: "Performance that year was also greatly impacted by the bursting of the tech bubble, which began in March 2000 and stretched all the way into 2002. Florida recount uncertainty was a factor, but not the sole driver of poor equity returns in 2000 or during that longer period."

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Sure. But what about an election that already seems destined for some, ahem, contention well before it's decided?

"Even though there is controversy associated with this election and undoubtedly heightened anxiety among a wide range of voter groups, Wall Street is taking things in stride so far," Bogdanova says. "The stock market seems much more focused on economic trends, inflation, the Fed's interest rate policies, corporate profits, and innovation—the typical issues that have historically had the greatest impact on stock prices.

"If something unusual happens during the election or in its aftermath, of course this could capture the stock market's attention. But market participants have learned over the years to take heated political rhetoric and election drama with a grain of salt."

The broader takeaway here? Politics is not a black-and-white, nor all-or-nothing subject as it pertains to your portfolio's returns. Should you pay attention to the comings and goings in Washington? Absolutely. Just remember that most investments' movements are affected by a number of factors—hyper-focusing on any single one, politics included, will ensure you miss the bigger picture.

Thank you for spending some time with us this weekend! We'll see you next week!

Riley & Kyle

​WealthUp (Young and the Invested is now WealthUp)​

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