Election Years and the Markets: How Long-Term Investors Win the Race

When making long-term investment decisions, investors must adopt a rational and objective mindset. However, navigating the financial landscape during a presidential campaign year, when political rhetoric and speculation run rampant, long-term investors may be tempted to let political pundits and events influence investment choices. And, when investors give in to these temptations, it’s often to the detriment of their investment portfolio.

In this blog post, we will delve into the compelling reasons why upholding a long-term outlook during a presidential campaign year is not only prudent, but also advantageous for investors seeking long-term financial success.

A Unique Election

Election years are full of uncertainty.  Which candidate will win? What will be their economic policy?  How will the markets react?  These are all normal questions, but there is something remarkably unique about this upcoming presidential election; both candidates are U.S. Presidents. 

The last time a sitting president and ex-president ran against each other was in 1892. Grover Cleveland won the presidency in 1884 but lost it to Benjamin Harrison in 1888.  The two faced each other again in 1892 and Cleveland won back the presidency.  This was the only time in U.S. history an ex-president won reelection. 

Although this election year will undoubtedly have its share of twists and turns, the “markets” already have an idea of what to expect given that both candidates have occupied the White House.  This has the potential to remove at least some of the typical uncertainty we face as election day approaches.    

The Numbers

This year’s presidential campaign will undoubtedly be eventful, with the myriad of issues and uphill battles both candidates face.   While the political climate may introduce short-term fluctuations, history has shown us that maintaining our objective mindset regardless of who is in the White House can yield significant rewards over the long term.

If you look at a long-term chart of the S&P 500 Index, you will see an obvious upward trend for US stocks going back 100 years.  This upward trajectory has transpired despite shifting political environments, and despite what party occupies the White House or controls Congress.  Following are some statistics to illustrate this point.

1. Going back to 1928, the average annual return for the S&P 500 Index during an election year is 7.5%.   For a non-election year, it’s 8%.  The return is decidedly positive for election years (1).

2. For a portfolio that is 60% stocks and 40% bonds (60/40), the average return for an election year has actually been greater than that of a non-election year, with returns of 8.7% versus 8.5%, respectively (2).

3. Since 1928, a 60/40 portfolio has had a negative return in only 4 election years.  These were during the Great Depression, World War II, the Dot Com bust, and the Great Recession - events that likely influenced the stock market more than the general election (3). 

4. Going back to 1953, if you invested $1,000 and stayed invested only when Republicans held the presidency, you would now have $27,400.  If you invested $1,000 and stayed invested only when Democrats held the presidency, you would now have $52,100.  But, if you remained invested regardless of what party held the White House, you would now have $1.43 million (4).

The data above shows that investors who remain invested regardless of who occupies the White House will be rewarded in the long run. 

Some Thoughts to Help You Stay the Course This Year

Political Climate is Unpredictable

Political outcomes are inherently difficult to predict and polls are not only subject to change but are often inaccurate.   Furthermore, attempting to predict how political events will impact the markets is a daunting task, as even the most experienced experts often fail to accurately forecast political outcomes and their impact on the markets.  As a result, relying on political factors for investment decisions can lead to speculation and poor returns due to market timing.

Markets Tend to be Resilient

The historical data presented above demonstrates the market’s resilience regardless of the political climate. Despite any political uncertainties, markets have generally shown an ability to recover and grow over the long term. Economic factors, technological advancements, and business innovation tend to have a more significant influence on market performance than short-term political events. By focusing on these fundamental factors, investors can achieve more consistent and reliable returns.

Investment Horizon

Successful investing requires a long-term perspective. Investors who have a well-defined investment horizon of many years or decades should not be overly concerned with short-term political changes. Over the long term, the impact of political events tends to be diluted by economic growth and market dynamics. By maintaining a long-term perspective, investors can avoid knee-jerk reactions to political events that may have little relevance to their investment goals.

Diversification and Asset Allocation

Diversification and asset allocation are essential components of a well-rounded investment strategy. By spreading investments across different asset classes, sectors, and geographical regions, investors can reduce risk and potentially increase returns. When constructing a diversified portfolio, political considerations should take a backseat to factors such as risk tolerance, time horizon, and investment objectives. A well-diversified portfolio can withstand political turbulence and provide stability during uncertain times.

Emotion-Free Investing

One of the cardinal rules of successful investing is to avoid emotional decision-making. Politics can evoke strong emotions and biases, which can cloud judgment and lead to poor investment choices. By separating investment decisions from political beliefs, investors can maintain objectivity and ensure that decisions are based on sound financial principles rather than subjective opinions.

Conclusion

While politics may capture headlines and fuel debates, investors should resist the urge to let political events dictate their long-term investment decisions. Political landscapes are unpredictable, and trying to time the market based on political developments, or any development, is a risky endeavor. Instead, investors should focus on factors within their control, such as diversification, cost control, savings rates, and tax efficiency. By adopting a rational and objective approach, investors can increase their chances of long-term investment success and minimize the impact of short-term political noise on their portfolios.

As always, if you have questions regarding your investment portfolio, you should speak with an advisor who can help you make informed decisions. 

Tad Jakes, CFP®, EA

(1) Source: Bloomberg

(2, 3) Source: TIAA

(4) Source: Bespoke Premium