Donkeys, elephants, and the stock market

I must admit I have always been curious about whether the stock market performs better over the long-term under a Democratic White House or a Republican one. I have not set aside the time to analyze this but wouldn't you know, the good folks at Capital Group have put out an excellent eight-pager that answers this very question. Here are their takeaways and my thoughts.

Point 1: Election results have very little impact on long-term investors. Capital Group looked at S&P 500 returns from 1933 to 2023 wherein seven Republican presidents and eight Democratic ones have served. They found that the S&P 500 trended upward whether a Dem or Republican was in office. Could it be that markets are focused on the profitability of the underlying companies and reacting accordingly?

Point 2: Markets have been more volatile during primary season, but tended to rise strongly thereafter. This reminds me of a bit of advice a college professor gave me last century. Markets do not like uncertainty and once an election is settled, markets can digest likely policy decisions and move forward. Capital Group analyzed the first five months of election years from January 1, 1932 - December 31, 2023 to reach this conclusion.

Again, this makes sense. The first months of any primary season are erratic as there are any number of candidates vying for the White House. For example, by my count, there were 25 contenders for the Republican presidential nomination in early March 2024. Markets like certainty (or as near to certainty as we can get in this crazy world of ours).

Point 3: Investors often sit on the sidelines during election years out of fear and uncertainty, but that’s rarely a winning strategy. Net asset flows into money market funds have been more than twice as high in election years as in the year after an election. It is human nature to "hide" out of fear and a money market can be see as a "hiding" place.

This point made me reflect on an employee who was hoping to retire in 2002. Her 401k had always been invested in a money market account. She had written down a list of reasons why she had done that year after year for the prior twenty years. These reasons included everything from movements in oil markets to inflation concerns to the aftermath of 9/11. In doing so, she had missed out on the returns generated by the stock market.

I tried to make sense of her goals and dreams in retirement and then tried to square those with her 401k balance. I could not make ends meet. In fact, as I told her, I was beginning to think she might have to keep working. She was not happy with my opinion and it was one of the rougher conversations I have had in 34 years in the industry.

Point 4: Investors who were fully invested or made monthly investments did better than those who stayed in cash. This point is not surprising as it speaks to long-term investing and dollar-cost-averaging. In other words, patience. Capital Group looked at 23 election cycles since 1932 to reach that conclusion. I am fond of saying that past performance is no guarantee of future results and I certainly am not making predictions about the current election. Still, I draw some comfort from what insight we can gain from history.

The one caveat I would offer to all of this is what do we make of investors who do not have a long-term horizon. My 86-year-old dad comes to mind here. Respectfully, given his health, he may not have another ten to twenty years left in him. What I tell all of my 401k clients is to work with their financial planners to craft a strategy that might work for their time horizon, needs and goals, and risk comfort level. There is no "one-size-fits-all" solution but hopefully with professional guidance, appropriate results might happen.