As seen previously in Louisville Business First: https://www.bizjournals.com/louisville/news/2020/10/21/do-presidential-elections-affect-the-stock-market.html?iana=cco_landing_news
A common topic of discussion in many client meetings I’m having these days is the upcoming presidential election. As a rule of thumb, I find it’s always best to refrain from making investment decisions based solely on political opinions or forecasts. But without a doubt, the direction of the country, and in turn economic and fiscal policy, can change drastically from one administration to another.
Furthermore, election seasons can be emotionally charged regardless of the side of the aisle you claim. For better or worse, emotion can drive the majority of decisions you make throughout your lifetime. Investments are not exempt from that. Let’s analyze some data to separate logic from emotion and determine the best steps going forward after election day, regardless of the results.
Before we look at what happens after elections, let’s review how the markets typically perform in the year leading up to a presidential election. What’s interesting is that historically, performance is underwhelming in the 12 months leading up to an election. Over the course of the past 90 years, the average market return of any 12-month period in the S&P 500 is about 8.5%. However, during elections years, that number drops to 6%. Similarly, bond markets return on average 6.5% prior to elections versus 7.5% in other years. It stands to reason that markets favor certainty above all else. When there is potential uncertainty in the form of not knowing who will be leading the country for the next four years, markets become more volatile. That has certainly been the case this year, albeit with an assist from COVID-19. Suffice it to say, however, that from an historical perspective, this year is not entirely an anomaly.
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Now let’s look forward to what types of returns are typical after an election cycle. Average annual performance in the year following tends to be influenced by, as one might guess, who wins the election. However, it’s not divided by party line specifically. The factor that determines market performance is whether the election forces a change in control of the White House. When a new party comes into power, average returns during the following year are 5%. However, if the incumbent party retains power, average returns increase to 6.5%.
There are all kinds of other variables you could look at, such as the effects of divided governments versus one-party control of the executive and legislative branches, but the numbers are generally the same. The takeaway here is that ultimately, election results don’t have much effect on market returns, especially over a long period of time.
When you put together a financial plan for your family, you should consider a number of factors, most notably risk tolerance and time horizon. I think what happens during election years is that emotions, particularly fear and anxiety, drive our decision making. Fear of change and anxiety about the direction of the country are powerful feelings, no doubt. It’s not in my power to dictate the way someone should feel about politics. However, it does help to maintain a logical perspective by reminding yourself that historically, election results will not have nearly the effect on your portfolio that you might think. It’s somewhat similar to a day trader trying to time the market, waiting for the perfect day to buy into a stock when it’s hit the bottom. It’s nearly impossible to find the bottom, at least on a consistent basis. The same is true of elections. Waiting until a particular party is out of power ultimately robs you of time. If there is a golden rule of investing, it’s this: Time in the market is always better than timing the market.
Allowing an emotional election season to dictate changes in your portfolio strictly on the basis of fear is not a long-term strategy for success. Create a financial plan tailored to your needs. However, plans are nothing but a snapshot in time. Go through the planning process often to maintain the right balance in your portfolio and your assets over time. Remember, you’re in control of your plan. Don’t allow what’s going on elsewhere to determine your desired personal outcome.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
Eric Douglas is Partner and Wealth Advisor, Family Wealth Planning Partners.