My 2024 Election Prediction

A warning... Election talk on the bay... Are Democrats good for stocks?... Ewan McGregor and ophthalmic technicians... Low expectations are bad... Easy, fool... My 2024 election prediction...

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Stansberry Research is special...

I (Dan Ferris) want to acknowledge this important point before I delve into the main topic of today's Digest... At Stansberry, we pride ourselves on independence from influences that might force us to censor ourselves.

We're not beholden to advertisers. We're not managing anyone's money. We produce research that people want to read, and we make all our money from their subscriptions.

If our recommendations aren't good, you won't want our advice. So we have nowhere to hide. And that's good for you and us.

That independence is internal, too. As long as we deliver results for our subscribers, nobody pressures me or any of my colleagues to say one thing or another. This gives us the variety of advice and strategies you'll find from our many independent-thinking editors and analysts. It's one of the great things about Stansberry, which we all hope will never change. It's why we're valuable to you and why I enjoy what I do so much.

So we're not really in the business of publishing Stansberry company viewpoints about the world and the financial markets... And to be crystal clear, that is not what I'm doing today. This is my opinion and my opinion only.

But... I hope my colleagues will come to agree with me on the point I'll make in today's essay. You see, I believe there's a heightened risk that many investors will make a mistake that's likely to cost them a lot of money. I'd like to see us all deliver a powerful warning about that risk.

The risk I'm talking about came up on Tuesday at a company meeting on the shores of the Chesapeake Bay...

As Corey McLaughlin wrote to you that afternoon, our editors and analysts gathered for one of our periodic "offsite" brainstorming meetings... I flew in from my home on the West Coast for the event. 

Even if I never said a word during one of these events, the interplay of ideas among all these talented folks during a single day is well worth the two travel days it takes me to get there and back.

The highlight of the day for me was participating as a member of a panel focused on the upcoming presidential election, along with Whitney Tilson, Brett Eversole, and Greg Diamond.

We all have different styles of trading and investing, but we all agreed on the single most important point for investors...

If you consume news online or on TV, you've probably heard the shrill cries from talking heads warning that if the wrong candidate gets elected, it's the end of democracy or the end of America or the end of the world as we know it.

I'm begging you... please don't fall for any of this nonsense. Or, if you believe it, just don't let it change your investments.

If you are convinced that your favorite candidate will send stocks soaring... or the other guy will crash the market... you could be tempted to go all-in or hide in cash (depending on your guess for who will win).

This nonsense can get your portfolio killed. You're listening to your gut and your politics, not following a financial strategy. How you allocate capital should have nothing to do with who is in the White House.

Have you ever heard Warren Buffett say, "If so-and-so gets elected, I'm selling a bunch of stocks"? Of course not, because it's idiotic.

On Tuesday, we all agreed that the election doesn't matter for investors, and folks' belief that it does matter is a source of risk.

Buying and selling stocks based on your politics is a lousy idea. You'll do far better by keeping your political views out of your portfolio. You really can't afford to interrupt your compounding.

Greg Diamond might seem like an exception because he has studied market action during election years and is after all the editor of Ten Stock Trader, which is an options trading service. So he has some ideas on how the market has tended to fluctuate during election years and will base some of his short-term trading on that insight.

Still, none of his work was based on analysis of political parties and market action... only market action during all election years.

If you sell your stocks because you don't like the president, you're interrupting the stock market's magical compounding effect...

Regular readers of my work know that I'm concerned about a severe market crash and long-term sluggish returns... But that's not due to the election. It's related to market factors and government incompetence that will outlast any given president.

More importantly, even that concern doesn't keep me out of the stock market's compounding machine. I want to stay in stocks for the up years, and I'll use conservative investments in fairly valued, stable companies... safe bonds... gold... and currencies to survive a downturn.

Sitting out the market because you don't like the president may not make you lose money, but unless you're clairvoyant (or just get lucky), you'll almost certainly make a lot less.

Consider a $10,000 investment that compounds at 10% for 30 years. Year after year, you're gaining 10% on a larger and larger base. That's compounding... and successful long-term investors know it well.

Let's keep it simple and forget about taxes. At the end of year 30, you'd have a little more than $170,000 – a 17-bagger!

If you redo the numbers, compound for 10 years, then stop compounding for four years, then resume compounding until year 30, you wind up with about $120,000... a 12-bagger. That's still decent... but it's nearly 30% less money than if you hadn't interrupted your compounding.

If you do the same but stop compounding for four years in years 12 and 27, you wind up with a mere seven-bagger – a lot less than half what you'd have earned if you ignored presidential elections.

In other words, interrupting your compounding for four years because you don't like the president could cost you a ton of money.

So when it comes to investing for a well-funded retirement, presidential elections don't matter. This should come as a relief... Who wouldn't like one less thing to worry about in their retirement planning?

You might be aware of studies that seem to contradict me...

Plenty of researchers have compiled statistics on how the market has historically performed under certain conditions. For example, according to one study, from 1952 through 2020, the stock market averaged 10.6% per year under Democratic presidents and 4.8% under Republicans.

But does that mean that Democrats cause better stock returns? The study does not make that claim.

The problem is that nobody really knows why this has happened... or if it'll continue to happen in the future.

The fact that market data seems to correlate with presidential cycles is probably not as meaningful as many folks might conclude. One reason that might be true is that many correlations don't indicate a cause-and-effect relationship.

A website called Spurious Correlations is dedicated to showing chart after chart, each one with two sets of data that look very similar but have nothing to do with one another. Many of them are quite amusing...

For example, one chart plots the number of movies actor Ewan McGregor appeared in, which correlates very well with the number of ophthalmic medical technicians in Connecticut for the years 2012 to 2022. Another shows that the popularity of the first name Theodore has correlated perfectly with the fossil fuel use in Burundi since 1980.

Here's one possible explanation for the presidential correlation...

Nobody plans a career as an ophthalmologist in Connecticut because he heard that Ewan McGregor decided to make a certain number of films in the next few years. Likewise, nobody who wants to promote the growth of fossil fuel use in Burundi would go around trying to get more people to name their sons Theodore.

The absurdity of these propositions speaks for itself. It's the basis for the basic tenet that "correlation is not causation."

In the case of Democratic versus Republican presidents, though, the National Bureau of Economic Research ("NBER") has a theory behind why stocks have done better under Democrats. And it's not because Democrats are good news for the stock market.

The nonpartisan think tank published a paper in 2017 (updated in 2019), suggesting that it isn't about what Democratic presidents do while in office... it's about when they tend to get elected.

Democrats tend to get elected when expected future returns are high; Republicans win when expected returns are low...

When risk aversion is high, as during economic crises, voters are more likely to elect a Democratic president because they demand more social insurance. When risk aversion is low, voters are more likely to elect a Republican because they want to take more business risk...

Risk aversion connects the party in office to stock returns. Since high risk aversion gets the high-tax party elected, risk aversion is higher while the high-tax party – which we interpret as Democrats – is in office. The higher risk aversion translates into a higher risk premium under Democrats, generating the presidential puzzle inside the model.

Recent history seems to confirm NBER's assertion that a crisis is good for Democrats.

Joe Biden was elected in 2020, in the wake of a massive economic crisis caused by pandemic lockdowns. Barack Obama was first elected in 2008, nearly two months after Lehman Brothers went bankrupt during the darkest days of the biggest economic and financial crisis since the Great Depression. Bill Clinton was first elected in 1993, during the savings-and-loan crisis and in the wake of the recession of 1990 to 1991.

(If the NBER's model is correct, folks' mega-bubble behavior points to a Republican winning the next election.)

As you saw, the NBER's conclusions turn conventional wisdom upside down...

Stocks aren't responding to Democratic or Republican economic policies. If there's any basis for the correlation between Democratic presidents and higher stock returns, it's that Americans tend to vote Democrat when stocks are most attractively priced.

In other words, Democrats aren't good for the stock market. But a poor stock market performance that drives down valuations might be good for Democrats.

(I can't help mentioning that the NBER's finding also suggests, as I've often said, that valuation is the force of gravity and the only thing that counts for long-term equity returns. Low valuations mean high returns. High valuations like we have today mean low returns... no matter who is in the White House.)

Let me go a bit further...

Successful investing requires successful thinking, which requires ruthless integrity. The late great physicist Richard Feynman said in a 1974 commencement address at Caltech that:

The first principle is that you must not fool yourself – and you are the easiest person to fool.

As you consider the ultra-complex topic of which candidate is best, don't fool yourself into thinking something simple-minded and likely very wrong like, "Trump will be great for the economy and the market and he'll make America great again," or, even more absurd, "Trump will destroy our democracy."

At least as far as your portfolio is concerned, neither candidate will do anything but maintain the status quo – like all those before them. No matter who the next president is, he'll borrow, tax, and spend, and the government will grow.

Learning to understand, recognize, and control risk is the essence of successful investing. Understanding risk means constantly thinking of the ways you could be wrong. As Feynman might put it, a successful investor is constantly "bending over backwards to show how [he is] maybe wrong."

Like in science and investing, life requires some humility. That's especially true of folks' political views, which are dominated by emotions.

So instead of believing you know which candidate is superior, maybe spend some time thinking about how the other is better... and perhaps even how they're both a couple of power mongers who couldn't care less about you and your family.

But if you must holler at your TV set and tell anybody who'll listen that your candidate is better and the other is terrible, I understand. It's human nature.

Just don't let those opinions influence your investment decisions.

Finally, no discussion of elections is complete without a prediction...

This November, after all the votes are counted and the winner is announced, I predict that we will witness one of the most unprecedented and impactful events in the history of humankind... and that you are highly unlikely to read about it elsewhere.

The United States has had 59 election cycles since 1789, resulting in the election of 45 different men as president. This means we've had 46 peaceful transitions of political power, an enviable and rare record in modern times.

A study published in 2014 found that 68 countries (including China and Russia) had never had a peaceful transition of power as the result of an election during the period from 1788 to 2008.

I predict that the 2024 presidential election – our 60th – will not interrupt our unprecedented winning streak of peaceful transitions of political power.

That's one prediction I'd bet on every time, and in exactly 200 days, we'll find out if I'm right.

In the meantime, don't do anything dumb with your portfolio.

New 52-week highs (as of 4/18/24): ABB (ABBNY), Agnico Eagle Mines (AEM), Altius Renewable Royalties (ARR.TO), Aya Gold & Silver (AYASF), Alpha Architect 1-3 Month Box Fund (BOXX), Kinross Gold (KGC), SilverCrest Metals (SILV), and Wheaton Precious Metals (WPM).

In today's mailbag, we have feedback on one of our recommended links and a question about Federal Reserve policy during presidential election years... stemming from our Wednesday edition about the central bank's acknowledgment of higher inflation... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.

"I took a double take after reading the April 17th Digest and saw your marketing ad under Recommended Links with the title 'What Could Have A Bigger Impact On Your Money Than The Election' and the picture next to it with the $100 bill with [Altimetry founder] Joel Litman's face perfectly covering Benjamin Franklin's face making it look like Joel had Franklin's long green hair hanging from his head. Thanks for the LOL, I needed that." – Subscriber Kenneth S.

Corey McLaughlin comment: Thanks for the note, Ken. We appreciate your eagle eyes... and sense of humor.

"Hi Corey, Wouldn't it be difficult for the Fed to make any moves in an election year? I recall somewhere seeing the commentary that, generally, the Fed likes to cease moves 4-6 months ahead of the presidential election to avoid the appearance of potentially influencing an election outcome. If the above 'truism' is actually true – then I think we're in for the rates we currently have until at least the beginning of 2025." – Subscriber John D.

McLaughlin comment: Thanks for the note, John. So, I've heard this idea suggested, too, and it makes sense to me. But it turns out it's a myth... In fact, going back to the 1950s, 2012 has been the only election year where the Fed didn't raise or lower interest rates. Across those decades of election years, the Fed cut rates six times and raised them 10 times.

For this year, while I've warned that folks should consider the possibility of higher rates – if for no other reason than because so few people are prepared for the idea – I personally expect rates to stay where they are for the time being.

Even if politics (or an attempt to appear apolitical) doesn't play a role, the Fed's fear of causing a crisis likely will. That's the main thing the central bank tries to avoid (but typically ends up causing or contributing to anyway).

With inflation still down from its 40-year highs (though still high), the path of least resistance for the Fed is to stick with the "status quo" as it watches inflation numbers (and jobs and GDP) for the next three to six months. That's the line Fed Chair Jerome Powell is giving now. In the meantime, though, prices will probably keep going up...

Good investing,

Dan Ferris
Eagle Point, Oregon
April 19, 2024