Election Year Anxiety
Every four years, during the Presidential election cycle, some clients get nervous about the election and how the outcome will affect their investments. Normally there is a fear that if their favored candidate loses, the stock market will tank. I will never forget hearing a client say in 1992 that if Bill Clinton got elected, the stock market was going to collapse. And did it?
We’ve had similar conversations with clients during every Presidential election. Most worry that the markets will be adversely affected, and they earnestly want to know if they should alter their portfolio allocation due to this risk.
As you can see from the graph below there really is no predictable pattern of returns that one can see during Republican vs. Democratic terms since 1929.
Given this unpredictability, we suggest you avoid altering your portfolio allocation due to who you may or may not favor in the upcoming election and whether you think your favored candidate is going to win.
Election Year Returns
Sometimes we are asked by clients if they should sell some of their investments, wait until the emotion of the election is over, and then buy them back once things settle down. Naturally, we are opposed to this type of thinking and behavior.
Looking at history, operating this way would have been a mistake. Trying to time the market is almost always a losing game long-term. In fact, as the graph below indicates, there are more years when the market fell in the year after the election than the year of the election. But here again, no consistent pattern emerges that can be relied on and used to predict future returns.
Who Should Get the Credit for Good Market Returns?
We feel presidents get too much credit when the economy is good and stock returns are positive, and too much blame when the economy is weak, and returns are poor. Economies go through cycles and periods of growth and contraction and they always will – regardless of which party is in power.
The credit for good long-term market returns should go to all of us, the people of all socioeconomic levels and countries who build the companies that create stock market wealth. Credit goes to those who participate ethically in government, education, law, and all other fields that contribute positively to civil society. For it is only when everybody does their part that the circumstances exist for productive innovation and improvement. This is all much bigger than who sits in the White House.
As the below graph illustrates, markets have rewarded long-term investors under a variety of Presidents, and we believe it will continue to do so.
In summary, we leave you with four takeaways:
1. It is difficult to identify systematic return patterns in election years, so don’t let your emotions regarding the election cause you to alter your portfolio allocation.
2. On average, market returns have been positive both in election years and the subsequent year, but they have varied greatly from Presidential term to Presidential term.
3. Market expectations associated with election outcomes are already embedded in security prices.
4. Expect this year’s election rhetoric to be even more dramatic than usual.
Please contact us with any questions.