Episode 333 - The Presidential Puzzle: Trump's Win and Expected Stock Returns

Episode Summary

Executive Summary: The episode contrasts two themes: why some highly capable DIY investors still hire advisors, and why the 2024 Trump win should not be read as a signal to time U.S. stocks. The main technical section explains the “presidential puzzle”: U.S. excess stock returns have historically been much higher under Democratic presidents, likely because elections reflect time-varying risk aversion rather than party policy directly. The hosts conclude that diversification and staying invested matter more than political predictions.

Main Topics: Physician Financial Independence conference and DIY investors (Priority: 5/5): Ben and Mark discuss presenting to a large physician DIY-investing community, where many attendees already had strong financial basics but still sought advice for complexity, time constraints, and liability concerns. Why financially literate people still hire advisors (Priority: 5/5): The hosts explain that even capable investors may prefer delegation because personal finance requires constant decisions, changing laws, and emotional discipline; advisory services can function like a retainer for ongoing decision support. The presidential puzzle: Trump, Democrats, and expected returns (Priority: 5/5): The core segment reviews research showing that U.S. equity risk premia have historically been much higher under Democratic presidents than Republican presidents, but argues this is not simple evidence that one party is better for stocks. Risk aversion as the causal mechanism (Priority: 5/5): They summarize Luboš Pastor’s theory that elections are endogenous to market conditions: high risk aversion during crises tends to elect Democrats and also implies higher future expected stock returns; low risk aversion in booms tends to elect Republicans and imply lower expected returns. Why politics should not drive market timing (Priority: 5/5): The hosts emphasize that even if the historical pattern is real, it is too unstable and context-dependent to justify going all-in or shorting U.S. stocks, especially given recent out-of-sample periods and the difficulty of re-entering after selling. Listener reviews and podcast feedback (Priority: 2/5): They briefly discuss mixed reviews, with strong praise for Canadian content and the RESP episode, highlighting that the show serves multiple audiences and topics. After-show discussion: Bitcoin and broader worldview shifts (Priority: 2/5): The conversation ends with informal discussion of Bitcoin, political ideology, and how shifts in regulation and global policy could affect crypto’s legitimacy and adoption.

Key Arguments: Many DIY-focused investors still seek professional advice because they already know the basics but value help with ongoing complexity, changing legislation, and family-level responsibility. Time and attention are scarce even for capable professionals; outsourcing financial decision-making can be rational when personal bandwidth is limited. The historical equity risk premium is not the same as raw stock returns: stocks have generally been positive under both parties, but excess returns over T-bills have differed substantially. The apparent stock-market advantage under Democratic presidents is likely a consequence of high risk aversion and crisis conditions, not proof that Democratic policy directly boosts markets. Electoral outcomes and market conditions are linked through investor/voter sentiment, so correlation should not be mistaken for causation. No historical model is reliable enough to support large market-timing bets; even a good explanatory model can fail badly in an individual presidential term. Diversification and staying invested are the practical takeaways; political events should inform expected return assumptions, not trigger dramatic portfolio shifts. Delegating portfolio management—via asset allocation funds or advisors—can reduce the influence of personal political beliefs on investment decisions.

Data Points: Episode number: 300 (introduced in the opening banter) - The hosts discuss the milestone episode at the start, though the later in-show episode number is referenced as 333 in the transcript content. Physician Financial Independence group membership: north of 30,000 - Describes the size of the Canadian physician and family Facebook community oriented toward DIY investing and planning. Common mistakes identified in Ben’s physician talk: 10 planned, expanded to 12 - Ben says his conference talk on common physician money mistakes ended up including 12 mistakes instead of 10. Historical excess return under Democratic presidents (1927-2015): 10.7% per year - Average market return in excess of three-month T-bills under Democratic presidents in Pastor’s paper. Historical excess return under Republican presidents (1927-2015): -0.2% per year - Average market return in excess of three-month T-bills under Republican presidents in Pastor’s paper. Updated excess return under Democratic presidents (1927-Oct 2024): 10.29% annualized - Ben recalculates the series through October 2024 and finds the Democratic excess-return premium remains very large. Updated excess return under Republican presidents (1927-Oct 2024): 2.23% annualized - Ben recalculates the series through October 2024; the Republican period remains much lower than the Democratic one. Trump first-term equity risk premium: 14.4% annualized - Used as an out-of-sample example showing that historical models do not perfectly predict any single presidency. Biden term equity risk premium through Oct. 2024: 9.12% annualized - Used as another recent comparison point against the historical model. S&P 500 gain after 2016 election through Jan. 2018: north of 30% - The hosts cite an example of a client who sold equities before/after Trump’s election and missed substantial gains. S&P 500 gain over Trump term (2016-2020): 80% in USD terms - Illustrates the cost of selling in reaction to political fear if the investor stayed out of the market. Physician household portfolio exposure in example: ~$5 million invested; 90% fixed income; ~4% U.S. stocks - A conservative client example used to show how emotional selling can still be costly even when equity exposure is relatively small. Conference date: November 2 - They attended the Physician Financial Independence Conference together on this date. Recording date for discussion: November 20 - Ben notes the conversation is being recorded on November 20.

Pivotal Quotes: "The most reasonable way to use that information is in setting your expected return assumptions." — Benjamin Felix: Ben explains that the presidential-puzzle research should influence return expectations, not market-timing behavior. "You have to be right twice. You have to get out at the right time and you have to get back in at the right time." — Mark McGrath: Mark summarizes why selling stocks based on political events is so dangerous and hard to execute successfully. "The causal direction is the key to the paper here." — Benjamin Felix: Ben clarifies that the research argues risk aversion drives both election outcomes and expected returns, not vice versa.

Implications: Listeners should not use election outcomes to time markets. The useful takeaway is that high valuations and low risk aversion imply lower expected U.S. returns, so diversification, discipline, and realistic return assumptions matter more than political bets.