The world of investing is ever changing and teaches new lessons to even the most astute investors. For many in the industry, this is the hallmark of what keeps our work interesting and rewarding, even though the process can be incredibly humbling and frustrating at times. The last ten years underscore this inherent challenge, and they have certainly provided many abject reminders. In our view, one of the most important lessons learned – or bluntly reiterated – over the last few years has been that financial markets are primarily driven by fundamental factors. Despite the fact that politics has recently been top of mind for many market participants and political issues have dominated every media outlet, as well as many Thanksgiving table discussions and watercooler conversations, the ultimate impact of such matters on financial markets has nonetheless been dwarfed by two other far more important topics: the Federal Reserve’s interest rate policy and corporate earnings growth trends.

This dichotomy was particularly apparent during the months leading up to, and immediately following, the Presidential election in 2016. This specific period of time was surely fraught with more political uncertainty than we have collectively experienced in quite some time. Moreover, even though most typical political discussions elicit emotional responses, this recent period seemed to reach a cacophony of alarm, causing many observers to make dire predictions if political outcomes weren’t in line with their views. By extension, many investors once again drew the seemingly inevitable conclusion that “it would surely be different this time”, even though history has repeatedly shown that politics generally have little impact on financial markets.

And yet, what many people did not realize, or perhaps simply chose to ignore, is that hidden beneath the political rhetoric, corporate earnings had reached a significant turning point during the fourth quarter of 2016. Following seven quarters of negative earnings growth in 2015 and 2016 that was primarily driven by a significant decline in oil prices as well as an appreciating U.S. dollar, earnings finally grew 9% in that breakaway quarter. Meanwhile, the Federal Reserve was continuing to implement its very well telegraphed plan to slowly and steadily raise interest rates. The financial market reaction was, not surprisingly, positive and this improving trend continued throughout 2017.  Furthermore, 2017 ended up being one of the least volatile periods for financial markets in history – an outcome that very few who were focused on politics would have predicted.

During this same period, we maintained our investment discipline, and we kept an overweight position in equities since we fundamentally recognized that corporate earnings growth was poised for recovery. Even as political conversations began to reflect an increasing protectionist bent, we introduced more international equity into portfolio allocations because early indicators suggested that the earnings recovery would be global in nature. Indeed, equity markets rallied around the globe during 2017, and international equities delivered exceptional returns.

Of course, change is the only constant, and this year has been decidedly different; and an argument can be made that politically driven outcomes have, in fact, finally impacted financial markets. On the plus side, the new tax law passed by Congress late last year strongly influenced corporate earnings growth this year. On the flip side, however, shortly after these tax changes were enacted, the general political tone changed, and tariffs and global trade began to dominate headlines as the President focused on campaign promises to bring manufacturing back to the U.S. and halt intellectual property theft. This all presents a complicated landscape for corporations, especially multinational companies with complex supply chains that cannot easily reposition their businesses. Still, this risk of potential drag on growth remains dwarfed by the overall positive impact from lower corporate taxes. Indeed, throughout the summer months, U.S. equities seemed to ignore this potential risk and the S&P 500 rose 10% between May and August.

With the U.S. midterm election fast approaching and headline worries, if not actual volatility, again returning, we still feel that regardless of whether “red” or “blue” prevails, financial markets will continue to focus on, and ultimately be driven by, the “green” prospects of corporate earnings growth and Federal Reserve policy. The U.S. economy is very healthy and corporate earnings growth is poised to continue at an accelerated pace through the end of the year.

Of course, with just a few months left in this year, it is arguably more important to focus on what 2019 might bring. Even though earnings will inevitably slow from this year’s impressive pace, overall returns should still be positive. This year has been characterized by tremendous earnings growth but relatively muted returns. As a result, general valuation is still reasonably attractive, setting the stage for a continuation of trend in 2019.

For those who can no longer stand another political ad or conversation, perhaps there is some comfort knowing that, unless the outcome of political decisions impact corporate earnings growth or interest rates, your portfolio is essentially colorblind to the never-ending fireworks of the current political environment.