Politics and Your Portfolio: Managing Your Investments During a Contentious Election

By David Wise & Chris Hostetler

What a year! 2020 has thrown everything at us – pandemic, recession, social unrest, hurricanes, murder hornets, and Tiger King. To top it off we are rapidly approaching a heated election, and the race to the White House has the political parties on edge. 

Does the election matter? Absolutely!

Does it matter to your investments? Maybe not as much as you think.

It’s normal for election years to breed anxiety, division, and uncertainty, but we’d like to explore what this actually means for the investment markets and whether you should be changing your investment strategy over the next few months.

Generally the markets do not respond well to uncertainty of any type; political uncertainty is no exception. For a recent Election Day example, look at 2016, when many investors were surprised when Donald Trump won the presidential race. On election night, the futures markets dropped severely in response to the unexpected result. But it didn’t take long for the markets to recover, as investors absorbed the news and equity prices surged the very next morning. 

But surely the market prefers one political party over the other, right? Policy changes can indeed have a significant impact on the economy, especially in certain sectors (i.e. healthcare or finance). And during years of conversations with our clients, we’ve noticed that most people tend to assume that one party is better for the economy and the markets. There tends to be a lot of anxiety based on the “other side” winning the election. This is especially true during highly charged elections like the current one.

But the truth is there’s no statistically significant causal relationship between market performance and party success. Neither Republicans nor Democrats are indubitably better for the investment markets. The US has remained the world’s strongest economy over the last century, even as the White House and Congress have changed hands between the two parties. The economy overall is likely to continue growing as we reopen from COVID19 shutdown. 

Let’s consider this from a few angles:

  • Presidential party – Since the 1920s, the White House has switched parties 11 times. The economy and the market have continued to grow regardless of regime change. Although the market has performed better overall during Democrat presidencies, there doesn't seem to be a direct cause and effect plus average returns are positive for both parties.
  • Divided government – It doesn’t seem to matter whether the same party controls the White House and Congress or whether the branches are divided between parties. Historically, the branches are split between parties about half the time, and the market has similar returns as it does during one-party rule.
  • The presidential cycle – There’s a more discernible trend here, with the first two years of presidential terms averaging weaker (but still positive) returns, while the second half of presidential terms bring above-average returns.

What’s important here is that there are very few predictable historical trends. During every election cycle, partisans argue their side’s cause and try to prove that their candidate would be better for your wallet. And yet the market has continued to climb regardless of which party is in charge. Historically, market returns are simply not a direct reflection of political results.

The markets are driven more by economic growth, which is in turn driven by innovation, entrepreneurial ambition, increased investment and productivity gains . Right now, the key to our economic future is how we address the pandemic and whether we can safely reopen schools and businesses.

To be sure, this year’s election does bring some unique challenges. With the pandemic likely meaning larger numbers of mail-in ballots, we might be facing an uncertain result come November 3. Investors are hearing echoes of the 2000 contested election between George W. Bush and Al Gore, and it wouldn’t be surprising to see a Trump-Biden recount somewhere. If there are any key states that require a recount, we could very well see heightened market volatility in the days and weeks after the election.

Generally we believe you should stay invested and stay diversified – before and after the election. This could make it sound like there’s no way to protect your portfolio from the buffeting uncertainty. But in truth it requires affirmative planning to stay invested when the news is frightening, and there are a couple things you can do:

  • Avoid getting sidetracked by the political milieu. Listen to somebody with a different viewpoint, and then go vote for what you believe in.
  • Bolster your cash reserve – you should always have a healthy reserve of liquid cash to cover unexpected expenses, an especially important safeguard when markets are volatile.
  • Talk with your advisor to refresh your financial plan, and invest in a diversified portfolio for the long term.

If you’d like to revisit your plan or get a second opinion on your investment strategy, we’re happy to talk!

 

Additional reading:

https://www.forbes.com/sites/sergeiklebnikov/2020/07/23/historical-stock-market-returns-under-every-us-president/#190e9f1cfaaf   

https://www.kiplinger.com/article/investing/t043-c008-s003-how-presidential-elections-affect-the-stock-market.html  

https://www.fidelity.com/learning-center/trading-investing/markets-sectors/stock-returns-and-elections

Image source:

https://www.macrotrends.net/2324/sp-500-historical-chart-data

Disclaimers

This material is provided as a courtesy and for educational purposes only.  Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation. 

Asset allocation and diversification do not assure or guarantee better performance and cannot eliminate the risk of investment loss.

The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.  Indexes are unmanaged and do not incur management fees, costs, or expenses.  It is not possible to invest directly in an index. 

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