Election Years: What Do They Mean for Stocks?
It is no secret that 2020 is an election year. It is hard to escape all the buzz. We are constantly bombarded with opinions from social media, TV and radio. In this article, I would like to focus on facts; facts about how markets have performed historically during election years. I will do my best to set my opinions aside so we can take an honest look at what history can tell us about election years. I think the best way to do this is to ask (and answer) additional questions. Here we go!
The big question is, of course, “How have markets performed during election years?” According to research by Dimensional Funds, average returns for the S&P 500 have been positive in both election years and years subsequent to election years. Since 1928, the S&P 500 has had an average return of 11.3% in election years and 9.9% in the years following the election. Seems pretty good either way to me.
The next question that comes to mind is, “How has the market performed based on which party is elected?” Our friends at Dimensional Funds also helped us answer this question. During a presidential election year in which a republican ended up winning the election, the average return of the S&P 500 has been 15.25%. In years where a Democrat won the election, the average return has been 7.63%. Although there is a noticeable difference in performance here, let’s make sure we don’t lose track of the fact that in both scenarios the stock market has posted strong positive returns on average.
The third question that comes to my mind is, “How has the market performed in years where the incumbent president won the election versus losing the election?” Again, I have to thank Dimensional Funds for their help answering this question. In years where the incumbent president won the election, the average return of the S&P 500 was 13.95%. In years where the incumbent president lost the election, the average return was 10.61%. Take heart - double digit returns in both scenarios!
In the last several months, I have heard many opinions about what will happen to stock markets “if Trump is re-elected” or “if a Democrat is elected”, etc. The fact is we don’t know. We don’t know who will be elected or how that will impact the stock market and economy. Furthermore, the stock market is pretty good at factoring all of this into its price. If it looks like a certain candidate is going to be elected, the market will factor that in almost instantly. What this means for investors is that it’s really hard to “get ahead” of the market and profit from political information unless you have some insight the general public does not have.
Additionally, we at Financial Strategies Group believe that good investing - smart investing - is putting the odds in your favor and keeping them there. The theme I see present throughout these questions is that the market has posted strong returns, on average, in all scenarios. So, if we are trying to keep the odds in our favor then staying invested through an election cycle is the most logical course of action. Many of you may be thinking “sure, this sounds logical but this is no average election.” I can’t disagree, but what is an average election? You could make that same argument for just about every presidential election we have had in this country’s history. The fact that this is not a “typical” election should not cause us to speculate with our life savings. Staying disciplined with your long-term investment strategy makes just as much sense in an election year as it does at any other time.
This commentary on this website reflects the personal opinions, viewpoints and analyses of the Financial Strategies Group, Inc employees providing such comments, and should not be regarded as a description of advisory services provided by Financial Strategies Group, Inc or performance returns of any Financial Strategies Group, Inc Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Financial Strategies Group, Inc manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.
This article is written by Brandon Carter.