EP 30 The Election Year & Your Investments

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Welcome back to Money Matters where I help guide you in becoming a better and more confident investor. So here we are in an election year, one that with the help of social media, maybe more charged than past election years, nonetheless, what does this mean for your investments?

Around this time in an election cycle, which comes like clock-work every four years investors are always wary of who will become president and what that means for the overall stock markets and more importantly their investments. To answer those concerns the best we can, let’s use history as our guide and look at the number.

It’s generally known that when the Republican Party takes office the markets tend to do better in the election year, and not as well in the inaugural year. And it’s the opposite for when the Democratic Party takes office. A lot of people generally believe that Democratic Party means more government, anti-business, Anti-Wall Street and free markets – and then the investor’s thoughts and fears start being priced into the markets as potentially micro-sell-offs take place. And then as times goes on these same investors find out that we have a very complicated system of government with checks and balances where it’s difficult for any president to put that much through Congress and the Supreme Court, so their fears subside, as the worst doesn’t come to fruition. And When Republican get into the White House the investor tends to be more optimistic as they feel Republicans are typically more business friendly, free-market oriented and anti-regulator – so the market can begin to trade on that optimism, but then again reality sets in during the inaugural year realizing with the check and balances the President can’t do everything they said in their campaign speeches, so markets don’t continue that trajectory and settle down.

So historically over the first two year periods Democratic or Republican they’re going to even themselves out.

Let’s go to some historical numbers to see what the past could possibly tell us about the future. According to the Schwab Center for Financial Research, the S&P 500 index, which give a good of idea of general market activity ended on a positive note in 17 of the past 23 presidential election years or 74% of the time with an average of 7.1% annual returns. The two calendar years following an election tended to be slightly less positive and the third year historically has yielded the best returns with an average annual return of 13.7%

And even when you go on to look at the six presidential election years where the market was down, most often than not had a unforeseen explanation – whether that was the Great Depression, result of World War Two, the Tech bubble, and more recently in 2008 the Great Financial Crisis taking over from weak credit default swaps when Obama took office, and this election may follow suit with poor performance if this COVID-19 pandemic continues.

This country has historically reelected the sitting president, which the market typically likes, because there’s no change. Generally speaking people don’t like change, nor does the market. But historically according to Schwab since 1929 the total return of the S&P 500 has averaged 57.4% under democratic presidents versus 16.6% under Republicans.

More reliable is the market’s influence on election outcomes. When the S&P 500 has risen in the three months before an election, the incumbent party usually goes on to win the White House with the opposite being true when markets are decreasing. Over election cycles my father is always quick to point out a quote James Carville, who was the strategist for Bill Clinton’s successful 1992 campaign. When asked how they won he looked over and stated “it’s the economy stupid”.

So yes we are in an election year, and yes it’s on top of a pandemic, and yes that’s on top of growing social movements, on top of in my opinion environmental issues that need to be addressed fast. So what can we take from all this? Historically there have undoubtedly been patterns that have emerged, but past performance as we all know it no guarantee of future results. And while I must say that in most of my videos, it’s true who knows what the future will look like, let this year with the Pandemic be a crash course on the sentiment. So like a majority of the time, the best thing to do is stick with you plan that you’ve created with your financial planner. Invest responsibly by proper diversification based on your age and risk tolerance so you can reach your goals regardless of who take office come November.

Thank you for watching and always thank you for giving your finances the attention that they deserve!