Investor Anxiety in Election Years

Ken Hargreaves, CFP®, AIF®, AWMA®, CRPC®

Every four years, the world waits in anticipation as the American people head to the polls and vote for their preferred presidential candidate. Each time, the consequences are far-reaching, impacting America’s foreign and domestic policies, her standing on the world stage, and the economy as a whole. But what about the stock market? Should you be worried about your investments, which likely represent years of hard work and diligent savings?

Well, what does history show us?

Election Year Market Movements

A sound indicator of stock market performance is the S&P 500, which tracks 500 of the largest American companies represented on the stock market. Looking all the way back to 1928, we can see that there have only been four years of negative returns during an election year. 

Historical U.S. Presidential Election Results & S&P 500 Returns

Election Year
President Elected
S&P 500 Returns
2016
Trump
12%
2012
Obama
16%
2008
Obama
-37%
2004
Bush W.
10.9%
2000
Bush W.
-9.1%
1996
Clinton
23.1%
1992
Clinton
7.7%
1988
Bush H.W.
16.8%
1984
Reagan
6.3%
1980
Reagan
32.4%
1976
Carter
23.8%
1972
Nixon
19.0%
1968
Nixon
11.1%
1964
Johnson
16.5%
1960
Kennedy
0.5%
1956
Eisenhower
6.6%
1952
Eisenhower
18.4%
1948
Truman
5.5%
1944
Roosevelt
19.8%
1940
Roosevelt
-9.8%
1936
Roosevelt
33.9%
1932
Roosevelt
-8.2%
1928
Hoover
43.6%

Let’s take a closer look at those four years of negative returns and what was happening at the time: 

1932 – The Great Depression

1940 – WW2

2000 – Dot-Com Bubble

2008 – Financial Crisis

So, were the markets so volatile in those years because of the election, or did other events influence the markets more than the election? I’m guessing the latter. Considering 83% of election years had overall positive returns, it doesn’t make much sense to withdraw funds now and buy back after the election. 

Zooming in on the election month itself (and those surrounding it, October and December), we see that while there is greater volatility, it doesn’t have much of an effect on the performance of the S&P 500. In any case, the markets usually recover by December

Average S&P 500 Performance Around Presidential Elections

December 31, 1927, through December 31, 2019 Source: Bloomberg Finance L.P.; analysis by T. Rowe Price.
Note that the 1-year prior return for the 1928 election was excluded from the sample because of lack of available data. Prior to formal S&P 500 index inception in 1957, data is source from Robert J. Shiller. (http://www.econ.yale.edu/~shiller/data/chatpt26.html)
Negative years are, therefore, the exception rather than the norm. Instead, positive returns can generally be expected, as they have been 83% of the time since 1928. In fact, election years average 11.28% return for the S&P 500. Why miss out on that kind of return?

Post-election Year

All of this may be a moot point if the new President comes in and wreaks havoc on the economy and stock market. So, you may be instead worried about what will happen to the markets the year after the election in the first year of the President’s term (or the first year of their second term). Again, history shows us that there is no need to panic.

The S&P 500 is more likely to have a negative return during the first year of a presidency than an election year itself. However, since the 1940s, you’re much more likely to experience a positive return, and those returns tend to be much more significant than losing years.

Winning Years: 

In 1945: 30.70%.

In 1981: 25.80%.

In 1989: 27.30%.

In 1997: 31.00%.

In 2009: 23.50%.

In 2013: 29.60%.

In 2017: 19.40%.

In 2021: 26.90%.

 

Losing Years:

In 1953: -6.60%.

In 1957: -14.30%.

In 1973: -17.40%.

In 1977: -11.50%.

In 1981: -9.70%.

In 2001: -13.00%.

Besides these potentially astounding results, you’re also likely to have decent results. Since 1944, the S&P 500 has averaged 6.2% in the first presidential year, a bit lower than the general average of 8.6% over the same time period. Not stellar results, but nothing you would want to miss, either.  

Also, to reduce your anxieties even further, let’s remember that your portfolio likely isn’t comprised solely of American stocks but also international stocks, bonds, and maybe even gold and real estate; therefore, American election volatility won’t affect your portfolio as much as it otherwise would.

What Are Your Options?

Let’s look at some potential scenarios: 

  1. Sell now.
  2. Sell at election time.
  3. Stay the Course.

As for the first two points, there’s no guarantee that prices will be lower whenever you decide to buy back in. And if your preferred candidate doesn’t win, will you wait another four years to buy back in and lose all of that investing time?

Even if the markets do go down, your stocks, ETFs, and mutual funds will still generate dividends, limiting the impact of any losses. Looking at the 2000s, the S&P 500 experienced a total negative return. However, once factoring in dividends, it had a 1.8% annualized return over the decade.  

By staying invested, you won’t miss out on any stock market rallies vital for long-term growth. Missing just ten of the best market days can result in giving up more than 50% of potential profits over 20 years!  Of course, missing the worst days could help, but just like the best days, you never know when the worst days will occur. 

Instead, what makes more sense is to trust the process of dollar-cost averaging, diversification, portfolio rebalancing, and staying the course. 

And trust your financial advisor. 

Most investing mistakes occur due to psychological factors. And that’s natural – your savings, your retirement, and your legacy are at stake when it comes to investing. However, it also clouds your judgment. A fiduciary financial advisor can help clear the distractions, eliminate the constant noise and fearmongering we’re bombarded with daily, and keep your portfolio on course for long-term success.

Final Thoughts

The President plays an enormous role in the economy; there’s no doubt about that. However, election season seems to have surprisingly little effect on the stock market’s overall performance. And what choice do we have? Trying to predict the stock market often ends in failure (or at least diminished returns), and with our life savings at risk, it’s not a risk we’re willing to make. 

To help ensure your portfolio is on track for long-term success, click the button below. With a cool-headed advisor by your side, you won’t have any reason to fear this election season. Instead, you’ll have the confidence and expertise needed to stay the course and build your wealth.

Disclosures

Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment or strategy will be suitable or profitable for a client’s portfolio. All investment strategies have the potential for profit or loss. Information presented is believed to be factual and up-to-date, but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the author/presenter as of the date of publication and are subject to change and do not constitute personalized investment advice.

A professional advisor should be consulted before implementing any investment strategy. WealthGen Advisors does not represent, warranty, or imply that the services or methods of analysis employed by the Firm can or will predict future results, successfully identify market tops or bottoms, or insulate clients from losses due to market corrections or declines. Investments are subject to market risks and potential loss of principal invested, and all investment strategies likewise have the potential for profit or loss. Past performance is no guarantee of future results.

Please note: While we strive to provide accurate and helpful information, we are not Certified Public Accountants (CPAs). The information in this article is intended for informational and educational purposes only and should not be interpreted as tax advice. It is crucial to consult with a CPA or tax professional to discuss you

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CFP®, AIF®, AWMA®, CRPC®

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