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Tag: Election

2020 Elections – Prepare and Be Patient

Pandemics and protests.  Wildfires, market crashes, and a recession.  If someone ever tries to tell the story of 2020 on film, it will take more movies than Star Wars.  At one point, we even had to worry about murder hornets.  Murder hornets! 

There’s no question this year has been a crazy one.  But it’s about to get even crazier – because a new presidential election is less than one week away. 

Over the last few weeks, several clients have asked us what the election could mean for the markets.  At a time when there is so much uncertainty to deal with, the thought of adding an election to the mix can seem overwhelming.  So, we thought we’d write about how we should prepare for both the run-up and aftermath of the election.  What exactly does the upcoming election mean for the markets?

Short-Term View: Prepare for Volatility

Uncertainty.  That’s the keyword.  Investors hate it, the year has been full of it, and the lead-up to a presidential election just brings more of it.  As a result, the markets often see increased turbulence in the month before an election.  For example, in October of the last four presidential election years, the markets fell.1 

We don’t ever try to predict the future, but we should be especially prepared for volatility this year. That’s because there are still so many question marks surrounding our economy and the pandemic. For example, the pandemic is showing no signs of stopping, and indeed cases may climb again as winter sets in. The economy has improved, but is still on thin ice, with unemployment rates still stubbornly high. Investors are watching Congress with bated breath, waiting to see whether they’ll enact a new stimulus package. If not, that could spell trouble, as many economists believe more stimulus is needed for the economy to recover.

But there’s another reason why we should prepare for volatility: The possibility of delayed – or worse, disputed – election results. 

Thanks to the pandemic, more people are likely to vote by mail than ever before.  Mail ballots take longer to count than traditional ones, and some states “will count ballots that are delivered after the election if they are postmarked by a deadline.”2  Because election officials are more concerned with counting votes correctly than quickly, we may not have a winner declared for several days or even weeks.  In fact, earlier this year, during primary season, several states needed more than a week before they could declare a winner. 

Remember, uncertainty is the key word.  Any delay may well cause more of it, which could trigger volatility.  Then, too, some politicians have cast doubt over the very idea of mail ballots.  If the losing candidate feels there is ground to contest the results, that could delay the process even further, leading to – you guessed it – more volatility. 

We don’t have to look far back in history to see what the markets did the last time results were delayed.  Remember the drama surrounding the 2000 election?  On election night, Florida’s results were considered too close to call.  Over the next month, Americans learned more than they ever wanted about things like dimpled chads and butterfly ballots.  The S&P 500, meanwhile, dropped over 8% between election day and December 15 when the result was finally decided.3

Now, none of this is to say that pre- and post-election volatility is guaranteed.  It’s not.  We should, however, prepare ourselves for it.  Because the more mentally prepared we are to weather short-term uncertainty, the better equipped we are to remember…     

The Long-Term View: Patience Over Politics

Every four years, we hear people say, “If the Democrats/Republicans win, we’re going to sell (or buy) because that means the markets will fall (or rise).”  It is understandable why people think this way.  After all, politics play an increasingly large role in our daily lives.  Why wouldn’t they impact our portfolio, too?  But the truth is, presidential elections are relatively unimportant when it comes to the markets, at least in the long-term.  A quick look at history bears this out. 

Historically, the S&P 500 has gone up 10.8% under Democratic presidents and 5.6% under Republican presidents.4 That’s not a large difference and can be attributed to a whole range of factors besides politics.  Either way, the markets tend to go up over time. 

One thing we’ve noted in recent years is that as elections get more partisan, so too does the rhetoric about how the candidates will impact the markets.  For example, here’s the opening sentence from a CNBC article published on November 3, 2016, shortly before the election:

Wall Street’s long-running view that Hillary Clinton would easily become the next president has been replaced by a new fear that Donald Trump could win, and it probably won’t be a pretty picture for stocks if he does.5  

Here’s a snippet from an article in the New York Post written a few months before Barack Obama was first elected:

…it’s hard to see how a President Obama would be good for Wall Street.  He wants to raise the capital-gains tax…[which] would be great for the tax-shelter business, but stocks would tank…in other words, the markets could fall further from their already-beaten down levels once the street begins to focus on an Obama presidency.6

Both these predictions ended up being wide of the mark.  In the first year of President Obama’s presidency, the markets rose 23.45%.6  In President Trump’s first year, the markets gained 19.42%.7  Doom and gloom is predicted more and more with each election and yet the markets keep going up over time. 

This is exactly why we are long-term investors.  As the saying goes, it’s not about timing the market.  It’s about time in the market.  This is why making investment decisions based on politics just doesn’t make sense.  As you already know, emotional decision-making has no place when it comes to investing.  But few things prompt as much emotion as politics.  That’s why it’s crucial that we keep politics out of your portfolio. 

It’s true that Trump and Biden have different economic policies, and some of their policies will affect the markets to a degree.  But the markets are like the world’s most complicated cake recipe, and the president is just one relatively minor ingredient.  Far more important are supply and demand, innovation and invention, mergers and acquisitions, the ebb and tide of trade, and a host of other economic developments both large and small.  Making major investment decisions based on politics would be like carefully measuring how much chocolate goes into your cake while ignoring the amount of sugar, flour, and eggs.

So, what does the election mean for the markets?  In the short-term, potentially a lot.  In the long term, probably not much.         

2020 has been a long, crazy year.  It’s possible the next few months could be even crazier.  But in the grand scheme of things, they are still just a few months, and this is still just one year.  We’ll be investing long after Trump and Biden are both names in the history books. 

In the meantime, our team is here for you to answer your questions.  Please let us know if we can be of service.  Be well, stay safe, and enjoy the rest of your year!     

SOURCES:

1 “S&P 500 Historical Prices,” The Wall Street Journal, https://www.wsj.com/market-data/quotes/index/SPX/historical-prices

2 “When Will We Know the 2020 Presidential Election Results? A Guide to Possible Delays,” The Wall Street Journal, https://www.wsj.com/articles/will-we-know-who-is-elected-president-on-election-night-a-guide-to-possible-delays-11596629410

3 “Why stock market investors are starting to freak out about the 2020 election,” MarketWatchhttps://www.marketwatch.com/story/why-stock-market-investors-are-starting-to-freak-out-about-the-2020-election-11600964863

4 “Democratic presidents are better for the stock market and economy than Republicans, one study shows,” Business Insiderhttps://markets.businessinsider.com/news/stocks/stock-market-election-democratic-republican-presidents-better-performance-economy-gdp-2020-8-1029528932#

5 “This is what could happen not the stock market if Donald Trump wins,” CNBC. https://www.cnbc.com/2016/11/02/this-is-what-could-happen-to-the-stock-market-if-donald-trump-wins.html

6 “Wall St. Death Wish,” The New York Posthttps://nypost.com/2008/08/04/wall-st-death-wish/

7 “S&P 500 Historical Annual Returns,” Macrotrends, https://www.macrotrends.net/2526/sp-500-historical-annual-returns

ELECTIONS & THE MARKETS

It’s that time again!  Every four years, Americans take a few minutes out of their day to choose the next President of the United States.  Under normal circumstances, voting is a simple, uncomplicated act—but the months preceding it are anything but.  After all, before we vote, we first have to endure the dreaded “campaign season.”  From endless televised debates to the plethora of signs on our neighbors’ lawns, “politics” becomes the order of the day.

If you’re like us, you probably don’t enjoy all the campaigning.  But you also know how important the political process is.  Being an informed, engaged citizen is crucial to maintaining the stability of our Republic.  That means asking some pretty tough questions, like: “Which candidate best represents my opinions and values?”  “What will each candidate do to ensure both our safety and our personal liberties?”  Getting the answers can be both frustrating and time-consuming.

Fortunately, there’s one question you don’t have to ask. 

“How will the election affect the markets?”

This is a question we get every four years.  This year, we thought we’d make life a little easier for you by answering it now.  That means you have one less question to worry about! 

So, how do elections affect the markets?  The answer is:

Not much.

Since 1957, the S&P 500 has gained an average of roughly 9.8% every presidential election year.1  Of course, there can be some massive exceptions.  For example, in 1928, the S&P rose over 37%.  In 2008, it fell over 38%.2 

But there’s a danger in using averages to try and predict what will happen.  Take the “Presidential Election Cycle Theory” for instance.  Once upon a time, many people believed that U.S. stock markets are always the weakest in the year following a presidential election.  This was the case for Franklin Roosevelt.  It also held true for Truman and Eisenhower. 

But in George H.W. Bush’s first year, the S&P 500 rose 27%.  In Bill Clinton’s first year, it rose 7%.  Barack Obama’s first year saw a 23% rise.  Donald Trump’s first year was 19%. 

It’s clear that the “Presidential Election Cycle Theory” just doesn’t hold water.  And that’s true for actual election years as well.  An average merely shows you what has happened, not what’s going to happen.  (Side note: this is why you often see the financial industry emphasize that “Past performance does not guarantee future results.”  Because it’s true.) 

“But what if the Democrats/Republicans win?  Won’t that have an effect?”

That’s the next question we get every four years.  Our answer:

Not really.

Don’t believe us?  Let’s take a little quiz.  Below are the last eight presidents of the United States, with their political party next to their name.  (We’re skipping Ford as he took office in the middle of Nixon’s second term.)  Look at each name and guess whether you think the S&P 500 went up or down during the first year of each president’s term.  Write your guess in the space provided, if you like.   

PresidentPartyMarkets Up or Down?
Richard Nixon (1st term)Republican 
Richard Nixon (2nd term)Republican 
Jimmy CarterDemocrat 
Ronald Reagan (1st term)Republican 
Ronald Reagan (2nd term)Republican 
George H.W. BushRepublican 
Bill Clinton (1st term)Democrat       
Bill Clinton (2nd term)Democrat 
George W. Bush (1st term)Republican 
George W. Bush (2nd term)Republican 
Barack Obama (1st term)Democrat 
Barack Obama (2nd term)Democrat 
Donald TrumpRepublican 

Now, maybe you’ll score 100% on this quiz.  But we’re willing to bet at least a few of the answers will surprise you.  Speaking of which, here they are.2 

PresidentPartyMarkets Up or Down?
Richard Nixon (1st term)Republican-11.36%
Richard Nixon (2nd term)Republican-17.37%
Jimmy CarterDemocrat-11.5%
Ronald Reagan (1st term)Republican-9.73%
Ronald Reagan (2nd term)Republican+26.33%
George H.W. BushRepublican+27.25%
Bill Clinton (1st term)Democrat+7.06%  
Bill Clinton (2nd term)Democrat+31.01%
George W. Bush (1st term)Republican-13.04%
George W. Bush (2nd term)Republican+3.0%
Barack Obama (1st term)Democrat+23.45%
Barack Obama (2nd term)Democrat+29.6%
Donald TrumpRepublican+19.42%

If a hypothetical investor had followed the “Presidentical Election Cycle Theory”, he or she would have missed out on some of the biggest gains in market history.  The same is true if that hypothetical investor had made decisions based on politics.  Convinced Democrats are terrible for the country?  Fine, but have fun missing out on Clinton’s second term.  Can’t stand Republicans?  Okay, but too bad you didn’t catch the train between Reagan and the first Bush.   

As worked up as we often get about our political beliefs, neither party tends to have that much impact on the markets compared to the other.  Historically, the S&P 500 has gone up 10.8% under Democratic presidents, and 5.6% under Republican presidents.3  That’s not a large difference and can be attributed to a whole range of factors besides politics.  Either way, the markets go up over time.  That’s because the markets are driven by far more than just one person or event.

Obviously, it matters a great deal who our president is … but not when it comes to the markets.  And that’s a good thing!  Here’s why:

  1. The Founding Fathers created a system of government where no branch (executive, legislative, or judicial) was supposed to dominate the other.  The fact that neither political party, nor election years in general, have that much influence on the markets shows that our system of checks and balances extends to investing, too. 
  2. Again, the markets are driven by far more than just one person or event.  They’re controlled by the ebb and tide of trade, by the law of supply and demand, by innovation and invention, by international conflict and consumer confidence.  The markets are like life.  The course our lives take isn’t determined by one gigantic decision, but by the millions of small decisions we make every day. 

We don’t know about you, but we find that comforting.

So, what’s the takeaway from all this?  The takeaway is that when it comes to investing, we control our own destinies, not politicians.  The way to reaching your financial goals is by having a sound investment strategy, making informed decisions, and taking emotion out of investing.  Not by worrying about the election.

So this year, as you watch the debates, chat amongst your friends, and decide who you want the next president to be, you can do so with the knowledge that whatever happens, the markets will go their own way … and so will you. 

On behalf of everyone here at Minich MacGregor Wealth Management, we wish you a happy (and headache free) election! 

1 “What could the S&P 500 tell us about Trump’s reelection?” Forbes, October 21, 2020.  https://www.forbes.com/sites/greatspeculations/2019/10/21/what-could-the-sp-500-tell-us-about-trumps-re-election/#3b5151ef4664

2 “S&P 500 Historical Annual Returns,” Macrotrends, https://www.macrotrends.net/2526/sp-500-historical-annual-returns

3 “Democratic presidents are better for the stock market and economy than Republicans, one study shows,” Business Insider, August 24, 2020.  https://markets.businessinsider.com/news/stocks/stock-market-election-democratic-republican-presidents-better-performance-economy-gdp-2020-8-1029528932#