By Tom Rasmussen, CFP®
Like clockwork, the presidential election comes around every four years. And with each election cycle, world politics and personal finance collide. Many Americans are trying to figure out how the outcome of the 2020 presidential election will affect the stock market and their portfolio, and what they should do about it.
For anyone who watched the first presidential debate, you may have felt more confused and less certain of which way the election will go than you did before watching it. Regardless of your political affiliation or which policies you align with, it is important to know how elections impact and affect the stock market.
Regardless of the short-term impact that the election may have on the stock market, we strongly recommend having a long-term strategy in place designed to withstand multiple election cycles, not just the current one. Because, at the end of the day, you still need to retire, and blowing up your strategy based on a single election is unwise.
Market Performance and Elections
Without a doubt, the U.S. presidential election creates some movement in the market, whether the movement is a legitimate response to events or an artificially one created through investors’ fears (this is common). As with any event that creates uncertainty in investors, volatility is sure to follow.
Leading up to the election, we already have seen volatility in the market and can expect more. If you get anxious during times of volatility, it is vital to take a step back, remember your strategy, and avoid doing anything drastic. Remember: Such volatility is typically short-lived.
As we move closer to the general election, we are being bombarded with news headlines and stories produced to grab our attention. Again, it is crucial to keep a level head and evaluate all information as objectively as you can, making minor changes or tweaks to your portfolio if necessary.
If you are unsure whether those tweaks are essential or if you are panicking, then consider talking to a fiduciary financial advisor. Their expertise and objectivity may be just what you need to keep your focus on your long-term goals, not the short-term noise.
In the year following an election, the markets have historically performed better if the incumbent President is re-elected, compared with a new administration taking over the Oval Office. This, again, is due to investor uncertainty. With incumbent Presidents, you know what you are getting four years into their term. With a new President, you know what they based their campaign on, but their policies are yet to be proven.
The years following the election can offer different results depending on a range of factors. It is impossible to predict what the market will do or what factors may alter a course. If you are wondering which “mix” of government offers the best return historically, Dan Clifton of Strategas Research Partners offers these statistics:
“Since 1933, the highest returning partisan control combination for the S&P 500 has been a Democratic Senate, Republican House, and Democratic President—while under this scenario the S&P 500 has had average returns of 13.6% per year, it would also mean every chamber has to flip in 2020 for us to get there. Our current combination, which would be likely if Trump won re-election, of Republican Senate, Democratic House, and Republican White House averages a 10.8% return.”
Investing Pitfalls to Avoid
It is easy for investors to overreact when any significant event occurs, as we have seen with COVID-19. Early in the pandemic, the market was oversold, and investors reacted too quickly by selling everything, whereas now, some of the market is overvalued.
The same ability to overreact applies to the 2020 election. Capital Group published a great article on this topic that I would like to touch on here. The report warns of three common mistakes that investors should avoid during the election cycle.
The first mistake is placing too much importance on a particular party winning the election. This is a mistake because, historically, election results have made little to no difference in the markets’ long-term performance. Here is a chart courtesy of the Capital Group article that illustrates the markets’ upward trajectory regardless of which party held the presidency:
The second mistake that the article warns of is being too easily spooked by early or primary-season volatility. As I wrote above, market volatility leading up to the election is expected; however, it typically does not last long.
During these periods of volatility, we generally recommend staying invested and sticking with your long-term strategy. It is because of volatility like this that you should have a well-thought-out strategy in place.
Finally, Capital Group warns of investors trying to time the market based on politics. It is just not possible to accurately time the market based on politics—or any other factor. You may get lucky from time to time, but continuously trying to time the market is a losing game, one that you will regret playing.
Many investors move to more conservative positions during an election year, meaning they are getting out of the market. Knowing when to get back in becomes the million-dollar question.
The article includes an analysis of the past 22 U.S. election cycles based on three hypothetical situations: being fully invested, making monthly contributions, or staying in cash until after the election was over. In 16 of the 22 election cycles, those who stayed in cash had the worst performance compared with the other two groups that stayed invested.
This is a great illustration of why we generally recommend you stay invested. Minor tweaks and rebalances can be helpful, but major changes to your portfolio should be avoided.
During an election year, the headlines are made to grab your attention and shift your focus to the negative. The candidates use this to highlight their solutions to the issues.
Do not fall into the media trap. During this time of uncertainty, it is important to control what you can, which is sticking to your financial plan and investment strategy.
Stay informed, but also turn off the news. Reading or running an endless number of election-result scenarios will just cause you to lose sleep.
As I highlighted earlier, presidential election results have very little to no bearing on the market in the long term. Take a step back and a deep breath. If you are nervous about what to expect going forward, we suggest meeting with your CERTIFIED FINANCIAL PLANNER™ (CFP®) professional to review your strategy and make tweaks if necessary.
You’ll likely come out more ahead than if you blow up your entire allocation because of which candidate might win.
Schedule a complimentary meeting with a CFP® professional to discuss your personal situation.