By Stephen Hassell, CFP®
It’s 2020, and if you thought the year did not already have enough uncertainty, it also happens to be an election year. Anytime an election year comes around, many investors reflect on the impact that future leadership may have on the country and, of course, their money.
A theme over the past two election cycles (at least) is this fear that the market may crash depending on who gets elected to the presidency. In this article, we will address the history of market performance surrounding presidential elections and give you recommendations on what to evaluate as we head into election season.
Markets Go Up More Often Than They Go Down
In general, whether we are talking about election years or not, the stock market goes up more often than it goes down. If this were not the case, I suspect many people would choose not to invest. This is not to say there is no volatility to deal with year to year, but that volatility is simply part of being an investor.
The chart below outlines how the S&P 500 Index (representing large U.S. publicly traded companies) has performed during non-election years. That return was an average +15.3% going back to 1933. If we examine presidential election years over that same period, the average return was nearly +10%. So less, but still strongly positive.
Not All Election Years Are Positive for Markets
Averages can sometimes be misleading. When you average many positives and a few negatives, you can still end up with a positive. So the previous chart certainly does not mean that markets always perform positively in election years.
The year 2008 is a great example of an election year that still weighs heavy for many investors who were there to experience it. While Barack Obama was elected in late 2008, this year was one of the worst on record for the stock market. The reason had essentially nothing to do with who was elected but with the reality of a financial crisis that we were several months into when election day came around.
Remember that many investors and publicly traded corporations are looking beyond the next four years to assess the inherent worth of these businesses. As a long-term investor, your approach to investing should reflect a similar mind-set.
Does It Matter What Party Gets Elected?
As much as each political party wishes their team was better for the stock market and economy, we just do not see any evidence of it when we examine historical rates of return.
The chart below examines average rates of return of the S&P 500 Index in election years (left) as well as average returns one year post-election (right). Whether a Democrat or Republican is elected to the presidency, the outcome (on average) remains roughly the same, and returns are strongly positive.
Again, this is not to say all election year outcomes are favorable, but on average, they have tended to be positive.
The Market Crash That Never Came—Reflections on the 2016 Election
In 2016, we experienced perhaps one of the most exciting (or frustrating) presidential elections in recent time, depending on your flavor of politics. Going into the 2016 election, many investors thought that the market would surely decline if Trump (or Clinton) was elected.
Again, there were strong opinions on both sides. If we examine what has actually taken place since election day, the results are overwhelmingly positive for investors who stayed the course. As the chart below outlines, the S&P 500 Index is up about 67% from the 2016 election through September 2, 2020.
Reacting emotionally to the 2016 election cost many investors dearly. To get into the mind of an investor who is trying to guess the future direction of markets based on political events, let’s explore some of that thought process.
This line of thinking can also be applied to just about any investment decision that is event-driven and reliant on emotions rather than rooted in a long-term plan.
Let’s say you were an investor during this time and took some (or a lot) of your money out of the market because you were certain that the market would decline post-election. What did you do when that did not happen?
You may have rationalized your position by saying that the market may be going up now, but it will go down soon. “Let’s wait and see.”
As the market continues to climb higher, it becomes more obvious that perhaps you might be wrong, but you may still not be willing to reverse course and get back in.
As the possibility that you may be wrong sets in, you find yourself hoping for a market correction so that you can get back in at a better (lower) price.
Maybe the correction comes, but when the market starts going down, it is doing exactly what you thought it would do in the first place. So you hold out for more, expecting that prices will continue to fall, possibly even falling back to the level at which you first sold.
As time passes, you fail to act, the market begins to climb again, and soon enough the market is making new highs.
You find yourself frozen and in disbelief and unsure of how to proceed.
What has been outlined is one of many potential thought processes that investors may experience when making decisions in financial markets based on emotion and it turns out they were wrong about their prediction.
While a loss in the markets can feel painful, one should not expect that being out of the market will provide comfort when the opportunity cost of positive returns continues to mount as they did in the above example.
If you choose to take action to position yourself in a more conservative position going into the election, just be sure you have a plan to get back in that is not reliant on emotions or on your prediction of market direction being the correct one.
So What Should You Do?
At it’s most basic level, as an investor, you should have your investment allocation (ratio among stocks, bonds, and cash) set in such a way that you can live with it through both good times and bad.
No one is smart enough to know when the good times will end and the bad times begin. Nor does anyone know how long the bad times will last when they do come.
The COVID market crash of 2020 is a useful example. Most any “expert” in markets suggested that the recovery would be very long in coming (i.e., U-shaped, L-shaped recovery). What actually happened was one of the fastest recoveries of all time (so far).
Attempting to time market inflection points can (like our 2016 example) lead you to miss out on returns that your financial plan will rely upon to meet your goals in future years.
If you don’t have a financial plan in place to help guide your investment process, then perhaps you should. Our Houma, La.-based financial planning firm finds that when working with clients, if they understand “why” they are invested a certain way and have their goals tied to those investments, they can be more patient when confronted with the volatility that will always be a normal part of investing.
If you’re unsure about whether you are invested properly going into the election, take a closer look. Make sure you understand how much of your investments are in volatile investments (like stocks). Seek out a professional advisor to help you understand the risk that you may be taking and guide you in a more appropriate direction “before” the next market correction.
Interested in getting a second opinion on your investment portfolio and connecting your investments to your goals? Schedule a 30-minute discovery call with one of our CERTIFIED FINANCIAL PLANNER™ (CFP®) professionals. On this complimentary call, we will discuss where you are financially, some of your pressing concerns, and how we can help.