“Your life doesn’t change by the man that’s elected”
—“Head Full of Doubt/Road Full of Promise” by The Avett Brothers
If you watch any of the major cable news outlets, you may think the world is about to end. Depending on your preferred channel, the reasons are completely different. Politics evoke strong emotions, and election season can be a difficult time for investors to maintain a long-term perspective. Given what has already happened in 2020—a deadly pandemic, a global economic recession, widespread civil unrest and extreme market volatility—moving to the sidelines would be an understandable reaction for clients who prefer to wait and see what happens. However, history has shown that is usually a mistake. A far better strategy has been to stay the course with a long-term investment plan right through the election cycle.
Since 1980, I have always been glued to the TV on presidential election nights. It wasn’t that I cared for politics when I was ten years old, but I watched for the same reason I would watch the Jerry Lewis MDA Telethon on Labor Day weekend: I was a nerdy numbers kid fascinated when the “tote board” would update.
2016 was the tenth presidential election I watched from the time the first poll closed until one candidate had the necessary 270 electoral votes. This election was the first one I remember being truly surprised by the result. Depending on what poll you looked at, Donald Trump was given a 15-30% chance of winning on election night. However, as the night wore on, Trump’s chances of winning started to increase. At 9:00 pm, it still looked like Hillary Clinton would win. By 10:00, Trump had become the favorite to win. By 11:00, it was clear Donald Trump was going to become our forty-fifth President. That’s about the time I received a text from a college friend of mine, saying “I hope you are selling everything for all of your clients. The market is crashing.”
While I would not call it a crash, the stock futures were certainly reacting negatively to the election results. The futures were down around 5% that night when I went to bed. By the time I woke up the next morning, they had started to rebound, and the market closed up 1.1% in the first day of trading after the election. As you probably know, the equity market has done very well since the 2016 election, despite the market’s initial reaction.
In election years, investors are bombarded with negative TV ads pointing out the other candidate’s faults and the country’s problems. This is particularly true if you live in a swing state like North Carolina. So it is no surprise if investors start feeling a little pessimistic. However, it is important not to let emotions drive your investment decisions. In this chart from Morningstar, you can see that during election years, investors actually put more money into money market funds than they do into equity funds. Election year is the only year of the four year election cycle that this occurs. The year following the election, investors pile money back into the stock market once they know the result.
Historically, stocks are generally pretty volatile during primary season (defined as the first five months of the year), but then tend to do well following the conclusion of primaries. Since 1932, stocks (as measured by the S&P 500 Index unless indicated otherwise) have gained an average of 10.2% in the 12 months following primary season compared to 5.8% in similar periods during non-election years. As measured by calendar year, stocks have had negative total returns in only two of the last 20 election years. You may be surprised to find out that stocks are less volatile than usual in the months just before and just after a presidential election.
History shows us that the President has far less impact than you may think on the stock market.
Yes, the President of the United States does have an impact, but there are many other factors that influence stock prices. Also impacting stock prices: interest rates, energy prices, technological innovations, geopolitical conditions, demographics, global pandemics, company-specific activity, consumer sentiment, global demand, trade flows, employment trends, regulatory environment, investor sentiment, valuations and more.
Despite what the candidates tell us in conventions, campaign commercials, tweets, and upcoming debates, the economy does not change immediately when a new President is elected. As Charles Schwab chief investment strategist Liz Ann Sonders puts it, “It’s not the case that the minute there’s a changeover in the White House, everything on the campaign platform becomes policy.”
Barack Obama and Donald Trump certainly have had different tax, regulatory, trade, and job creation policies. The following two charts show real Gross Domestic Product (GDP) growth and job growth over the final three years of Obama’s presidency and the first three years of Trump’s presidency. GDP is the statistic used to quantify recessions and employment numbers are discussed as much as any economic statistic. Can you see on the chart when Trump became President? I can’t either. It just looks like six years of smooth and steady growth. Despite how far apart the two candidates are politically and ideologically, the economy doesn’t radically shift for better or worse when there is a new occupant in the White House.
We do not. We encourage you to stay in the market and maintain your long-term allocation.
Immediate reactions to recent presidential elections have not been predictive of how the market would do during these Presidents’ terms. When Obama was elected President in 2008, the Dow Jones Industrial Average fell by 5% the next day. That was the worst post-election day result of the Dow since 1900. When Obama was re-elected in 2012, the Dow dropped 2.4% the next day. That was the second worst post-election day performance since 1950. In Obama’s eight years as President, the S&P 500 went up 182%. When it looked like Trump was going to become the forty-fifth President, stock futures fell 5% on election night, before rebounding the next day and actually closing up. The market is up 46% since Trump became President (1/20/17-9/18/20). Thus, the last three presidential elections have been met with instantaneous panic selling, at great cost to the sellers.
It has been pretty close over time. Thankfully, the stock market has done well regardless of which party has been in the Oval Office, as shown in this mountain chart.
We have mostly been talking about just the stock market, and we realize that very few of our clients are 100% invested in equity. The most common allocation our clients have is 60% equity/40% bonds. The chart below from Vanguard shows that the 60/40 annual returns from when there is a Democratic President are very similar to the returns when there is a Republican President. The chart also states that election year performance is historically better than non-election year performance.
Political gridlock is the stalemate that occurs when opposite parties control different parts of the executive and legislative (House of Representatives and Senate) branches. Gridlock makes passing laws or changing policy much more difficult. The below chart indicates that the scenarios we are most likely to see are historically good for the market. In the 42 years when one party has controlled the White House, Senate, and House of Representatives, stocks have averaged a 10.0% return. Stocks do even better (10.4%) if Congress is split, regardless of which party is President. The historically “worst” scenario is when Congress is controlled by the same party, but the President is in the other party. It is highly unlikely the “worst” scenario (in quotes because 7.4% is still not bad) will take place in 2020. If Trump is re-elected, the Republicans should maintain their majority in the Senate. If Biden wins, the Democrats should maintain their majority in the House of Representatives.
At Bragg, we believe the most important thing you can do is to stay invested and maintain your long-term allocation. Regardless of who wins the election, companies are going to keep innovating. If laws and regulations change, companies will find a way to adapt, just as many already have in response to the pandemic. The market can do well regardless of who is in the White House the next four years.
Get out and (or mail in your) vote!
This information is believed to be accurate but should not be used as specific investment or tax advice. You should always consult your tax professional or other advisors before acting on the ideas presented here.