On November 3rd, 2020 Americans will elect our next President. But even though the election is several months away, there is already a lot of speculation about what the stock market will do if either candidate gets elected. Unfortunately, much of that speculation is wrapped in fear with investors worrying that if the other guy (i.e. the candidate they don’t support) wins then the stock market will collapse or the economy will stagnate or taxes will go sky high or some other terrible calamity will occur that will wipe out wealth and destroy capitalism.
It’s nothing new. Like the Summer Olympics, Leap Years and the World Cup – this election year anxiety kicks in every four years and it’s a doozy as the standard uncertainty of not knowing what the market is going to do is amplified by the uncertainty of the election outcome.
While we have no ability to predict what 2020 will look like, we do have almost 100 years’ worth of data and 23 previous presidential election years (and administrations) to analyze.
Between 1928 and 2017, the S&P 500 had an average annual return of 9.9%. As you can see in Exhibit 1 below, the average return of the S&P 500 during a presidential election year is actually higher – 11.3% – and in the year following a presidential election the S&P 500 has returned 9.9% - exactly in line with long term historical averages.
S&P 500 Index: 1928–2017
Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. Index returns are not representative of actual portfolios and do not reflect costs and fees associated with an actual investment. Actual returns may be lower. Source: S&P data © 2019 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. Source: Dimensional Fund Advisors
You can also see in Exhibit 1 that the S&P 500 has had a positive rate of return during 19 out of 23 presidential election years. We’ve only had 4 years where we elected a president and market returns were negative:
1932: - 8.2%
1940: - 9.8%
2000: - 9.1%
2008: - 37.0%
So, what was happening those years besides a presidential election? In 1932 we were still going through the Great Depression. In 1940, Germany had invaded Europe and we were on the brink of our second World War. In 2000, the tech bubble burst and in 2008 we were in the middle of the Great Recession triggered by a collapse in the U.S. housing market which led to the subprime mortgage crisis. In each instance, there was something going on in the world that was a lot bigger than the presidential election.
Outside of the concerns about the general uncertainty of an election year, there are also concerns about Democrat versus Republican and which party is better for the U.S. stock market. As Exhibits 2 and 3 demonstrate, markets have done well under both parties:
S&P 500 Index: 1929–2019
Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. Index returns are not representative of actual portfolios and do not reflect costs and fees associated with an actual investment. Actual returns may be lower. Source: S&P data © 2020 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. Source: Dimensional Fund Advisors
Growth of a Dollar Invested in the S&P 500: January 1926–December 2019
Past performance is not a guarantee of future results. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio. Source: S&P data © 2020 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. Source: Dimensional Fund Advisors
Most administrations saw positive annualized returns during their time in office. One notable exception is George W. Bush – a Republican who was considered to be pro business, friendly to Wall Street, and who passed 2 significant pieces of legislation lowering taxes (including lowering the rate on capital gains and dividends). Yet despite the lower taxes, the S&P 500 had an annualized return of -4.4% during Bush’s 8 years in office – debunking the myth that Republicans and lower taxes automatically equate to positive market returns.
The next few months will be unlike any we’ve lived before as our country navigates a presidential election in the middle of a global health pandemic. But even though it feels different this time, some things never change.
- Don’t let short-term noise distract you from your long-term goals. We would not be surprised if market volatility picked up in the next few months – a combination of election-related jitters and ongoing questions surrounding COVID-19. Volatility is unsettling for all investors, so it’s important to maintain a long-term perspective and stay the course.
- Don’t let headlines dictate your investment decisions. There will be talking heads on TV and in the newspaper and on social media who speak with great authority about what will happen to the stock market on November 4th, 2020 depending on who gets elected. There’s a 50% chance they will be right. And a 50% chance they will be wrong. Rather than placing bets on the outcome like Red or Black at the roulette wheel, we believe clients are better served by implementing an academically based, empirically proven approach to investing and focusing on our Strategic Life Planning process to guide the decisions they make.
- There will be disappointment. George Washington was the only U.S. president ever to be elected unanimously – and it’s unlikely we will ever witness that again. But that’s the beauty of democracy… and why we hold a presidential election every four years.
- Focus on what you can control. Markets are out of our control, which is why we believe that a successful investment experience comes in part from focusing on what you can control including managing risk, implementing global diversification, and keeping fees and costs low. And during an election year that also includes exercising your right to vote.
With everything going on in the world, uncertainty will continue to be a theme in 2020. But at DHGWA we are passionate about enriching our clients’ lives by providing financial clarity and peace of mind so please reach out to your advisor with additional questions or concerns.
The information in this article should not be considered investment advice to you, nor an offer to buy or sell any securities or financial instruments. The services, or investment strategies mentioned above may not be available to, or suitable, for you. Consult a financial advisor or tax professional before implementing any investment, tax or other strategy mentioned herein. The information herein is believed accurate as of the time it is presented, and it may become inaccurate or outdated with the passage of time. Past performance does not guarantee future performance. All investments may lose money.