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Oct 2020

How Does An Election Affect The Market?

by | Oct 31, 2020

 

Like you, we hear a lot of people make bold statements about how the presidential election will affect the market.  A lot of these statements even contradict one another.  We decided it was time to actually get the historic facts and answer these common questions about elections and the market.  Be aware that any information we give here is based on past results.  Past performance never guarantees future results.  Below we address the common questions we receive around election time.

Before we address these questions, we have to get several things straight.  When advisors refer to “the market”, we are most often talking about the S&P 500.  This is an index that measures the performance of America’s 500 biggest companies.  The S&P 500 provides an excellent snapshot of the American stock market.  It is also important to know that the S&P 500 originally began in 1926 and has experienced an average annual return of about 10%.  While this is not a consistent return that is experienced every year, this has been the average.  Both Democrats and Republicans have been in power during this time.

1. Does the market care if a Democrat or a Republican gets elected? – In short, not really. This graph from Forbes nicely illustrates that the market has grown during the presidential terms of both Republicans and Democrats.  George W. Bush’s terms did not see market growth, but he also faced the Dot Com market bubble burst as well as the Great Recession of 2008.  By the way, this graph below is a fantastic example as to why we encourage people to take the long-term, consistent, “boring” approach to investing. 

As provided by Forbes.  Stock market returns by president. Past performance is not a guarantee of future results.

2. Does the market go up or down around the time of an election? – Keeping the graph above in mind, Dimensional Funds reported that the market has been positive in 19 out of the 23 election years (from 1928 – 2016). The market only showed negative returns 4 times.  This stands in line with the fact that the market has performed well over the long run.                                                 

3. Isn’t the market more volatile during election time? – First off, it is important to define volatility. Volatility simply refers to the up and down swings that markets tend to experience.  Greater volatility does not necessarily mean that the market is going down; it simply means that those swings are larger than normal.

This question does tend to be true.  In the months leading up to an election, the typical swings in market movement tend to be wilder than in non-election years.  There is one critical reason behind this – all markets hate uncertainty, which is what an election brings.

4. Should you sell your investments before an election? – PFA strongly believes that any investments you make in the market should be part of a financial plan. This plan must be designed to weather the storms that the market will throw at you.  This includes the volatility spike that we see during elections.  Also, in case you missed it, see our “Quote of the Month” by Charlie Munger, please!   

So, what should we do with all of this?  As advisors, we typically have clients who get nervous during election years.  But election volatility is nothing new.  In fact, the market has done quite well during election years.  While it may not be exciting, sticking with your investment plan really will give you the greatest chance to realize the best results.  The American economy and the market are closely tied together, and they have proven to be far stronger than the divisive politics of this country.  That should be the greatest takeaway of all.

“There’s no system to avoid bad markets.  You can’t do it unless you try to time the market, which is a seriously DUMB thing to do.” Charlie Munger

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