EDITOR'S NOTE: AMDG Financial's founding partner, Wayne Titus, provides a more in-depth analysis of presidential elections and their effect on the markets in this video.
We’re now less than 100 days from the 2020 U.S. elections, and increasingly, clients have been asking how major elections, such as the presidential election in November, might affect their investments. Questions include: Is it better or worse if the incumbent wins? Will I wake up the day after the election to find another market decline? How should I prepare?
Of course, there’s no way to predict the future, and it’s important to understand that many things affect market returns, such as corporate earnings, monetary policy, globalization, and, as we saw in February, even unexpected events like the coronavirus outbreak. All of these possibilities make it difficult to identify systematic return patterns in election years, although we can look to historical data for the following types of questions:
How has the U.S. market performed in other presidential election years?
On average, market returns have been positive both in election years and the subsequent year. According to data from Dimensional Fund Advisors, the average return of the S&P 500 has been 11.3% during an election year, and 9.9% in the year subsequent to the election. (See Figure 1.) During the election years when the market was down, other market-moving events were also happening, like the Depression, a war, or more recently, the burst of the tech bubble in 2000 and the Great Recession in 2008.
The story for developed international markets over the same period is similar. Data show the MSCI EAFE Index, which tracks large and mid-cap representation across 21 Developed Markets countries (excluding the U.S. and Canada) delivered an average return of 6% during a U.S. election year, and an average return of 14.5% in the year subsequent to the election. (See Figure 2.)
Figure 1: S&P 500 Returns During & After Election Years.
(Note: Elections cycles are shown in eight-year increments.)
Figure 2: MSCI EAFE Index Returns During and After Election Years
(Note: The MSCI EAFE Index was developed in 1969.)
Has the stock market performed better under a Republican or a Democratic president?
Since 1929, the S&P 500 has performed better during Democratic administrations, with an average total return of 57.4% (vs. 16.6 for Republicans). However, as this article in Forbes points out, there’s no evidence to conclude that the markets performed better because a Democrat was in the White House. Too many other factors, such as the ones I mentioned earlier, can influence market returns — making it impossible to draw a direct correlation between the election and market performance.
Interestingly, a report by Charles Schwab’s Michael T. Townsend discusses that the market’s influence on election outcomes may be more reliable. According to Townsend, when the S&P 500 has risen in the three months preceding an election, the presidential incumbent has generally won re-election; however, when the S&P 500 has fallen, the incumbent has generally lost.
How can I best prepare my portfolio in a presidential election year?
The best way to prepare for any situation is to focus on proper diversification, prudent investment management, and a goals-driven approach to market allocation. If you work with AMDG Financial, you have all three. Stock prices always fluctuate through time, and occasionally, we experience market declines. However, a major event in one market may not affect stock prices in every market — which is why a diversified portfolio makes sense. In addition, a mix of asset classes can help to minimize overall volatility and price impact on your portfolio.
Investing is a long-term commitment, and if you’ve worked with us for any amount of time, you know that we often advise clients to focus on what they can control. You can control your goals, the design of an investment strategy that accounts for market declines, how much you save, how often you look at your portfolio and how often you listen to alarming news reports.
The prospect of continued uncertainty may be making you nervous, and that’s understandable. News of a coronavirus resurgence and its economic impact, President Trump’s indication that he may not accept the election results, and the battle for control of the Senate are just a few of the concerns circulating in people’s minds right now.
We can never be sure how a single event, like a presidential election, will affect your portfolio, but we do know this: Dealing with uncertainty is one major reason why investors earn a return over time. If uncertainty didn’t exist, it wouldn’t make sense for investors to earn a greater return over time. Applying discipline, maintaining realistic expectations and taking a long-term view will go a long way toward helping us all maintain our financial well-being as November approaches.