Ep. 40: Presidential Election & The Stock Market

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Welcome back to Money Matters where I help guide you in becoming a better and more confident investor. The presidential debates are underway and with that comes a lot of uncertainly. With social media, and news outlets amplifying opinions from both sides across the globe, people are coming out of the woodwork with advice and predictions. I find professionals and experts like to make predictions because put simply the upside out weights the downside. Think about it for a moment. Some investment ‘experts’ comes out and makes a bold prediction. And with all the noise you essentially have to make a bold prediction if you want to cut through the noise and get a chance at being liked, shared, and put on television, you almost have to be. But with these bold predictions say this individual is right. Then they’re a genius! And go on to more recognition and praise. But if they’re wrong, no one seems to really care, and history quickly forgets the comments that were made. That’s just the way the news and social media works… With that grain of salt out of the way, what do U.S. elections mean for investors?

Here at Colby Financial Guidance of Raymond James, we believe, as with most short-term predictions, that investors shouldn’t let it take over their long-term investment plan that you have set in motion. And historical numbers and election results support us in that claim.

I’ll defer to Vanguard’s economist Adam Schickling who analyzed more than 150 years of asset returns to see if there was a correlation between electoral events and the stock market. He analyzed not only returns under both the Republican and Democratic parties but also went into whether election-year uncertainty exposed markets to lower returns and or higher volatility.

In his research, Adam used the classic 60% equities and 40% fixed income. He found a modest differential under administrations of different parties but went on to point out that this is statistically insignificant as it is time-period dependent. Dismissing this as having little to no value in the context of an investment strategy. His finding also shed light on modest return differentials that exist between presidential elections years and non-election years, but again states this being insignificant as there is no correlation and likely attributes this to randomness or noise.

I wanted to touch on this graph, from this Vanguard study again using a 60/40 stock/bonds portfolio based on data from Global Financial Data. You can see going back to 1860. Which is when the Republicans took office with Abraham Lincoln. But as you can see from that point on, between the Democrats and Republicans, and the amount of time spent in office, the returns are .1% off from the mean. If you ask me, that is not enough to deviate from your investment plan and start trading in different ways.

Now to touch on market volatility as we head into an election. I feel because of the news, and social media, and debates, and conversations you have amongst friends and co-workers the stock market can seem more volatile than usual. Or put another way – Your mind now has a reason as to why this short-term randomize machine, that is the stock markets is down or up. When in reality, no one can predict how the market is going to act day-to-day, week-to-week. But all the mind needs is something to attach their thoughts to which is why humans feel the stock market is more volatile in the weeks leading up to the election but in reality, it’s the opposite. The 100 days lead up to an election, and the 100 days after an election are historically less volatile than the rest of the time the market is trading.

So what are the takeaways here? Don’t lose sight of your long-term financial plan and goals that you have. Don’t get side-tracked by all this political noise. Say you're on a dollar-cost average investment plan, like many are when dealing with their 401(k) plans - stay the course and keep those investments in place. I know that this year seems heavier than years past and more charged, I can certainly feel it. But we are trying to move on from this current pandemic and the stock market has rebounded and some. Capital markets are extremely complex systems affected by so many different external variables from revenues, valuations, the business cycle, interest rates, optimism, pessimism, you name it! Remember whichever party is in the White House is just one of these many variables inputted into this equation that makes the stock market tick. And as you can see from history, elections are a variable that offers little to no insight that you should be changing your entire investment strategy on. And if you are, I feel that would be a mistake. 

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