The record voter turnout and record early voting in 2020 have been just one indication of how high emotions are running during this election. Our team continues to be asked what this election means for markets and individuals’ portfolios. Our answer is, “Possibly less than you might think.”
People have had extremely strong opinions about Trump and Biden. As a nation, most of us care deeply about the outcome. While there are important policy ramifications that will impact all of us, history has shown that the broader markets don’t care which party is elected, yet people are still concerned about the outcome.
Nick Murray, a financial advisory professional for more than 50 years, says his network of thousands of financial advisors reported more election-related anxiety among investors before the 2020 election than ever before. In his October 2020 Client’s Corner newsletter, Murray advised, “Take your political convictions completely out of your investment decision making…The mistake a lot of investors seem hell bent on making these days is thinking that the person and policies of the president are importantly correlated to the stock market. There is zero basis, in fact, for this conviction.”
What has been the difference when different parties controlled different branches of the government? YCharts analyzed stock returns going back to 1930 under three separate scenarios. When one party controls the White House and both houses of Congress, the Dow averages 10.7 percent annual returns. When there’s a split Congress, stocks average 9.1 percent returns. But when the president is in the party opposite of both the House and Senate, stocks have delivered 7 percent average annual return.
We Can’t Predict the Future
As the world learned in 2016, what looks certain to happen doesn’t always materialize.
On the night of the 2016 election, as more states began reporting and a Trump victory became increasingly likely, stock market futures sank rapidly. Everyone was sure that Hillary Clinton had clinched the election. The S&P 500 fell more than 5 percent in premarket trading, and trading was halted.
But by the time the market closed the day after the election, the index was up more than 1 percent. Before November 8th, 2016, pundits predicted an instant recession, markets tanking and stocks sinking. However, between 2017 and 2019, the average annual price return for the index was more than 14 percent.
It’s futile to try to predict the future, and with a proper plan, you don’t have to! Looking at historical trends about stock market performance before, during and after presidential elections can help us set our expectations (with a healthy dose of salt).
What History Tells Us About How Elections Affect the Markets
One steady trend is that, historically, volatility in the stock market increases in the months leading up to an election.
Researcher Dan Clifton notes these additional market trends during elections:
- If the S&P 500’s performance in the three months leading up to Election Day is positive from the three-month mark through the close of Election Day, the incumbent party historically wins. Since 1928, this indicator has predicted 87 percent of election outcomes and every election since 1984.
- When looking at the four-year presidential cycle since 1928, the year before the election has the strongest average returns, at 12.8 percent.
- Since 1936, open presidential election years have historically returned just 2.5 percent on average, while presidential re-election years have returned 10.3 percent.
- In election years when the incumbent party won, the S&P 500 averaged 10 percent returns versus 2.8 percent in years when the incumbent party lost.
These are interesting trends to watch, but again, they do not predict the future. Flukes are always possible, as we saw in 2016!
Do U.S. Stock Returns Fare Better with Democratic or Republican Presidents?
Bespoke Research shows that since 1900, the Dow Jones Industrial Average has gained 4.8 percent annually, regardless of which party is in the White House. However, stocks do better in the lead-up to elections when America is signaling a Republican presidential win.
Peter Lazaroff, author of Making Money Simple, says U.S. stock returns have been much better when a Democrat was the president. His conclusion is based on his review of total returns for the S&P 500 during presidencies since 1929. However, he says it would be a mistake to conclude that stock returns were higher because a Democrat held the presidency.
Lazaroff says there is no conclusive evidence suggesting the U.S. president’s party has any statistically significant impact on U.S. equity market returns. Stock returns are influenced by myriad factors, including valuations, corporate profits, business cycles and monetary policy. Plus, the S&P 500 generates more than half of revenues outside the United States. The increasingly global economy reduces the overall impact of the actions of a single government.
Don’t Mix Your Portfolio with Politics
As always, we recommend looking to the long term when assessing your portfolio’s performance. Making knee-jerk decisions about your finances while feeling strong emotions of any kind never ends well.
According to a new report from SunTrust Advisory Services, people who have sold U.S. stocks to protest any winner of past presidential races, whether Democrat or Republican, has meant losing out on skyrocketing returns during the new president’s first year in office. Keith Lerner, chief market strategist for SunTrust, wrote in a report in October 2020 that for most years from 1933 to 2019, markets “have done well under a range of political scenarios,” regardless of which party occupied the White House. He adds that over the past 15 years, despite U.S. politics becoming increasingly acrimonious, the S&P 500 still outshined, with a 20 percent-plus return, during the first year of any president following an election. on Monday. “We strongly caution against mixing portfolios and politics.”
It Doesn’t Really Matter Who Wins
Resist the temptation to exit the market during tumultuous times. Nick Murray says, “When you radically alter your long-term portfolio because of current events—even when you tell yourself it’s ‘just this once, and just briefly’—you’re not investing anymore. You’re gambling. Too many people find to their regret that once they’ve crossed that line, they’re never able to get back.”
It doesn’t really matter who wins our elections. Those who are voted into office won’t be in office forever anyway. In November 2022, the entire House of Representatives and a third of the Senate will have to face the voters again. If any party moves too far with policies the general public dislikes, they will most likely be voted out.
So go ahead and celebrate or complain about the outcome of the 2020 election. Just don’t make any changes to your investment strategy based on how you feel about it. The key is to work with a trusted advisor to develop a plan based on your needs today and in the future. The plan must be dynamic and updated as circumstances change in your life, tax rules change or your portfolio becomes overweighted in any single asset or sector.
Regardless of who is president, and regardless of any turmoil in the markets, we strongly advise that you stick to your long-term plan. What happens week to week, month to month or even year to year is not important. Your long-term ability to maintain and enhance your standard of living is what matters most. Trying to time the markets simply doesn’t work ,whether there is concern about an election or any other event. We expect new challenges for investors as inflation increases, volatility continues and tax laws evolve. These challenges also present an opportunity for those who are prepared both financially and psychologically. We have been told that the 2020 election has been the most important in our lifetime—but so will the elections in2022, 2024 and every two years after.
Our team is here for you and your family. We have developed and refined our Personal Vision Planning Process® over the past 30 years for times like today. Please reach out to me personally, at (440) 974-0808 or email@example.com, or to any of our team, with questions or if we can otherwise be of service. Your vision is our priority.
The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of Randy Carver and not necessarily those of RJFS or Raymond James. Expressions of opinion are as of this date and are subject to change without notice. Investing involves risk and you may incur a profit or loss regardless of strategy selected. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor’s results will vary. Past performance does not guarantee future results. Diversification and asset allocation do not ensure a profit or protect against a loss.