As the election nears, we are bound to hear all sorts of negative comments about how the country will suffer and the stock market will decline significantly if either candidate wins. How should investors respond to one of the most anticipated and divisive elections in recent history?
What is the evidence?
Let’s be clear that we all have a bias as to who we want to win. Some may even assume the other candidate will be bad for the country and the stock market. However, we need to step back from the rhetoric and our own fears and biases and consider the evidence.
The historical evidence is clear that there is no correlation between market returns and which party controls the presidency. The reality is that historically markets tend to grow over time regardless of which party controls Congress or the presidency. The chart below shows the return of the S&P 500 since 1926 by president. The average return by president is 10.3%.
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.
Here is another way to look at the same market return information:
Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. Index returns are not representative of actual portfolios and do not reflect costs and fees associated with an actual investment. Actual returns may be lower. Source: S&P data © 2020 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved.
If you still think that your party is best for the stock market, see the chart below that compares the returns of each party since 1937 to overall market returns. Note that the performance by each party assumes that an investor sells the portfolio and holds cash while the other party controls the presidency. This chart also reflects the power of staying invested and letting returns compound over decades.
Source: Morningstar Direct, as of October 7, 2020. For illustrative purposes only. The above chart shows what a hypothetical portfolio value would be if a hypothetical investor invested $1,000 in a portfolio that tracks the S&P 500 TR index on January 1, 1937, under three different scenarios: a Republican presidential administration, a Democratic presidential administration, or staying invested in the market throughout the entire period noted. Chart does not reflect effects of fees, expenses or taxes. Index returns included reinvested dividends.
If you take the emotion out of this issue, it is quite logical as to why the stock market doesn’t care which party controls Congress and/or the presidency. Stock prices reflect the current best estimate of future cash flows of all the companies that make up the stock market.
But there are hundreds of data points that could affect each company’s profits, with federal tax and regulatory policies being just several of those data points — you could also include cost of goods to make products, customer tastes, shipping costs, fuel costs, costs of borrowing funds for operations, competitors, global events, etc. The same is true for the overall global economy.
Ultimately, each company will continue to try to sell their products or services to their customers as best they can regardless of which party controls Congress or the presidency.
Yes, there may be certain sectors or companies that win or lose over time as federal policies change. For example, if Biden and the Democrats win, green energy may be promoted. But even if green energy is very successful, it will likely take decades to fundamentally change that sector of the economy.
Yes, policy may change around taxes, immigration, healthcare, etc. with a new administration. However, none of the changes are likely to be so dramatic overall as to fundamentally change the expected future returns of the overall stock market over the long term. After all, no president wants the stock market to tank under their watch.
But this time is different because … our instincts and bias might make us feel like this time is different. Logically, though, it’s likely not different for the reason stated above. Again, each company we invest in will ultimately continue to try to sell their products or services to their customers as best they can regardless of which party controls Congress or the presidency.
What should I do?
Markets could be volatile in the short term if the election results aren’t immediately known or are contested. As this column consistently indicates, we must accept and even embrace the uncertainty that comes with investing in the stock market, even when uncertainty might get uncomfortable.
Trying to time any of the possible events is impossible. Keep in mind you “get paid” for dealing with that uncertainty and volatility by earning higher rates of return in the stock market over time compared to risk-free cash.
Because no one can accurately predict how the markets will react to elections or any other global event, it’s important to maintain a diversified global portfolio. There may be winners and losers in certain stock market sectors under a new administration, but again it is almost impossible to accurately predict them and, maybe more importantly, the timing of the gains and losses.
If you have a long-term investment and financial plan you feel comfortable with, don’t change it just because of the election. The markets don’t care about your fears or who you want to win. Again, your personal goals and the goals of the vast bulk of the companies you are investing in shouldn’t change regardless of who controls Congress or the presidency.
Nevertheless, if you still have concerns over the future of the markets due to the election or otherwise, then your current portfolio allocation might not be right for you. You need to be in an allocation of stocks and bonds that you feel comfortable with through elections and any other market turmoil that might occur — and is bound to occur — from time to time. If this applies to you, please reach out to your financial advisor to discuss your concerns in more detail.