Election Season is here.
In my 30+ years of being a financial planner, this is my 8th election. I don’t know if it’s my memory failing me or if this is just a really heated presidential election (hope it’s the latter) but in all of these years, I have never been asked about what the presidential outcome would mean to the markets as often as I’ve been asked this year. And in turn, I have never participated in so many webinars and zoom calls about the election and the stock market. So, I thought I would take this opportunity to share what I have learned.
Are there any correlations between elections and the S&P 500?
We vote for a new president every four years but is there a correlation between the election and the stock market? Does the election influence the market or is the market just cyclical? As with anything, give statisticians and economists numbers and they will try to figure out if there is a pattern. There have often been trends in stock market returns for presidential cycles. It makes sense that in year one and two, a newly elected president is busy trying to establish him or herself and his/her policies, year three and four will often see an increase in the market as the president shores up the economy and gets ready for re-election. Most scholars agree that the third year of a president’s term is usually the most profitable in the market. “In 2016, Charles Schwab analyzed market data going back to 1950 and found that, in general, the third year of the presidency overlapped with the strongest market gains.[i] It is also interesting to see that if you look at each of the 23 election years (which would be the 4th year of the President’s term) since 1928 and compare it to the S&P 500 index, there have only been four times that the market was negative in an election year: 1932, 1940, 2000 and 2008. “According to the 2019 Dimensional Funds report, the market has been positive overall in 19 of the last 23 election years from 1928–2016, only showing negative returns four times.”[ii] You can kind of guess, given the years that there were also extenuating circumstances like the Great Depression, the tech bubble and the housing crisis. It will be interesting to see how the 2020 market finishes the year, given the Covid crisis in the same year as the election.
Presidents Come and Go
What I have gathered from all of the information that I’ve looked at and listened to is that presidents and political figures come and go and financial markets keep marching on. “According to Siegel, author of the 1994 investment classic Stocks for the Long Run, Wall Street’s obsession with politics is mostly misplaced: ‘Bull Markets and bear markets come and go, and it’s more to do with the business cycles than presidents.’”[iii] There are so many different economic fundamentals that play into the market’s returns and politics is just another piece of the puzzle. “The statistics are compelling. In the 22 presidential elections since 1928, 14 were preceded by gains in the three months prior. In 12 of those 14 instances, the incumbent (or the incumbent party) won the White House.”[iv] So in theory, you could have a good probability of predicting the next president based on the three-month prior stock market return. We will have to wait to see if the stock market will correctly predict the election this year?
What does the market look like, after all of these elections?
After listening to all of these different economists and political pundits talk about how the market will be affected, depending on who wins the election, I have decided that the real truth is that over time the market usually goes up. I have included this chart to support my point.
“What should matter more to investors is staying invested. Although past results are not predictive of future returns, a $1,000 investment in the S&P 500 made when Franklin D. Roosevelt took office would have been worth over $14 million today. During this time there have been exactly seven Democratic and seven Republican presidents. Getting out of the market to avoid a certain party or candidate in office could have severely detracted from an investor’s long-term returns.” [v]
3 Mistakes to Avoid during Election Years
Here are three mistakes to avoid this election season, provided by our friends at Capital Group. First, don’t worry too much about which party wins the election, as far as your investments are concerned. We can see by the chart above, in the long term your investments should be fine.
Secondly, do not get overly concerned by the short-term volatility that occurs during the primary season, markets often bounce back after the dust settles. And last but not least, do not try to time the market. There is a lot of noise leading up to the election because that’s what sells and gets people fired up but may not be the best long-term investment strategy.[vi]
How can I help?
I am not trying to make light of anyone who is worried about this election, but I am trying to put the election into perspective with regard to your investments. If you need to talk to someone about your financial concerns, I am here to listen. If you need to have someone take a look at your investment portfolio, I am here to analyze. If you need to just chat about life, I am available to have coffee or take a walk, please do not hesitate to contact me.
Dimensional. “Matrix Book 2019