The 2020 Presidential Election and the Markets
2020 has been an eventful year thus far, and this November will be no exception when millions of Americans cast their vote for the next President of the United States. Although we cannot predict the outcome of the election, we can expect there to be plenty of speculation regarding the election’s impact on the markets. But, should long-term investors focus on the impact the presidential election could have on the markets or stick to their long-term plan?
Past Performance and Future Results
According to the 2019 Dimensional Funds Matrix Book Report, the market has ended the year with positive investment returns in 19 of the last 23 election years from 1928–2016. Negative returns were experienced in 17% of election years since 1928. But, we all know that past performance is not a guarantee of future returns.
The 2016 presidential election serves as a prime example of the risks associated with trying to forecast market movement based on election results. It was popularly prognosticated in mainstream media that if Trump were elected president, the stock market would crash. But despite Trump’s victory and the uncertainty arising from a host of events including the Brexit vote, negative interest rates, trade wars, and geopolitical turmoil in the Middle East, the markets reached all-time highs prior to COVID-19.
You Can’t Time the Market
The problem with investing based on election theories or headlines in an election year is that there is no guarantee you will get the timing just right. And it’s not only deciding when to sell. The additional challenge is timing when to re-enter the market. It is not a sound investment philosophy. There are too many extant forces at play that affect market conditions to rely on rumination about election outcomes and how they could impact markets.
While it is only natural to draw a connection between the administration in power and the influence they may have on the markets, we caution long-term investors from making short-term changes to try and avoid loss from the changes in the political landscape. What matters most for the long-term investor is how their wealth grows over longer periods of time.
The chart below shows the hypothetical growth of wealth for an investor who put $1 in the S&P 500 Index in January 1926. The chart displays the political party of the President in office. Red denotates time periods when a Republican President was in office and blue represents a Democratic President. The chart shows that both parties have periods of significant growth and decline during their time, but there does not appear to be a pattern of stronger returns when any specific party is in office.
Past performance is not a guarantee of future results. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio. Source: S&P data © 2020 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved.
Markets Reward the Long-Term Investor
Markets have historically continued to provide positive returns over the long run irrespective of which party is in office. Making investment decisions based on election predictions is not a reliable way to capture excess returns. Instead, we focus on using our knowledge of equity markets to help investors grow their assets over the long-term.
Investors committed to a well-structured, globally diversified portfolio are positioned to capture the best performance of the markets when it occurs over time. The long-term game may be a less exciting approach, but as noted economist and Nobel Prize winner Paul Samuelson put it, “Investing should be like watching paint dry or grass grow. If you want excitement … go to Las Vegas.”
If you have questions or concerns regarding your financial plan or long-term strategy, the advisors at Northstar Financial Planning are always open for discussion. Please call us if we can help.
Ben White, “Economists: A Trump win would tank the markets,” Politico, October 21, 2016.