Election Misconceptions & Investment Returns

Election season is one of the most important aspects of our political system, but there’s no doubt that getting through it can be stressful.? All of us, at some point, will wonder things like, “What if my preferred candidate doesn’t win?”? “Who is my preferred candidate, anyway?”? “Does so-and-so really mean this?”? “Did so-and-so really say that?”? “What’s fact and what’s fiction?”?

But one thing you shouldn’t have to stress over is how the elections will impact the markets.? There are a lot of misconceptions that spring up every four years about what presidential contests might mean for your portfolio.? Most of these cause investors to worry unnecessarily.? As a financial advisor and portfolio manager it’s my job to create confidence in my client’s financial future, not anxious like the news.? So, in this letter, let’s do a brief dive into three misconceptions about election season and the markets.?

The first misconception is that presidential elections lead to down years in the markets.? It’s understandable why we might feel this way.? When we look back at past elections, the first things we remember are probably the controversies, uncertainties, and negativity.? Election years feel volatile in our minds and memories, usually because there’s so much drama and so much at stake.?

But statistics prove this misconception is a myth.? Since 1944, there have been twenty presidential elections.? In sixteen of those, the S&P 500 (The top 500 companies in the USA) experienced a positive return for the year.1? In fact, the median return for presidential election years is 10.7%.1? Of the four election years that saw a negative return, two did occur in this century – in 2000 and 2008 – but on both occasions, the nation was either entering or in the midst of a significant recession.?

Now, we do sometimes see increased volatility (the markets up and down movement) in the months leading up to an election.? If we just look at how the S&P 500 performed from January through October in a presidential election year, the median return drops to 5.6%.1? That’s not bad, but it is nearly 50% lower.? This suggests the uncertainty over who will triumph in the election – and the debate over what each candidate’s policies will mean for the economy – does tend to have at least some effect.? Then, as the victor is announced and the picture becomes a little clearer, volatility tends to subside, and investors move on to other things.? So, in that sense, election season does matter, but nowhere near what the media may have you believe.? Elections are just one of the many ingredients in the gigantic stew that is the stock market…and they’re far from the most important.????

The second misconception is that if one candidate wins, the markets will plummet.? This narrative is, frankly, driven by pure partisanship.? The fact of the matter is that the markets have soared under both Republican and Democratic presidents.? Naturally, they’ve occasionally soured under both parties, too.? Since 1944, the median return for the S&P 500 in the year after a presidential election is 9.8%.1? Since 1984?? The median return rises to over 24%.?

The reason for this is because of that gigantic stew I mentioned.? You see, the markets are driven by the economy more than by elections.?? By the ebb and flow of trade, the law of supply and demand, by innovation and invention, by international conflict and consumer confidence.? And while the president does have an influence on all this, it’s just one of many, many influences.? As a result, the markets are far more likely to be affected by inflation and whether the Federal Reserve will cut interest rates than by the election.

When you think about it, the markets are like life.? The course our lives take isn’t determined by one gigantic decision, but by the millions of small decisions we make every day.? The same is true for the markets.? I don’t know about you, but I find this comforting.?

The third misconception is that we have no control over any of this individually, and thus, no control over what happens to the overall stock market.?

It’s true. You and I can’t dictate who the president will be. But we will vote! We can’t determine how the markets will react.? But what we can control is what we will do and that is a mighty power indeed.?

As investors, one of the keys to long-term success is filtering out the noise and focusing on what really matters.? You see, the goal of all political campaigns – and the media that covers them – is to create noise.? That’s because noise provokes emotions.? Fear.? Anxiety.? Anger.? A greater emotional response leads to more clicks, more views, more shares, more engagement…and, yes, more money.? It’s understandable why campaigns and the media want these things.? But what we must guard against is letting those emotions drive our financial decisions.? Emotions promote the urge to do something – buy, sell, get in, get out, take on more risk, less risk, you name it.? They prompt us to make short-term decisions to alleviate what is, when you think about it, a short-term concern.?

A presidential term lasts four years.? But the goals of investing and financial planning are built around the time horizon you have planned for, and that lasts much longer.?

That’s why an investment strategy is built around the long-term.? It’s designed to help you not just tomorrow, or next month, but years and years from now.? It’s designed so that the president of the United States, as important as he or she may be, is only a passing mile-marker on the much longer road to your goals and dreams.?

So, as we draw near to another election, remember: Tune out the noise.? Remember these misconceptions and avoid them.? And most of all, remember that a good investment manager and financial plan sticks to the numbers, plans beyond the next media cycle, and tunes out the noise.

Please let us know if there is ever anything we can do.

Have a great summer!?????????

1 “Election year market patterns,” ETRADE, us.etrade.com/knowledge/library/perspectives/daily-insights/election-stock-patterns

"This is not intended as investment or financial advice but as educational content only. It is recommended that you do your own research and consult a licensed financial professional before making any changes to your finances. Additionally, past performance does not guarantee future results. This post does not communicate our firms investment position."