As always, I’m going to tell you to stay invested during an election year because discipline is critical to being successful over the long run. I came across some good historical tidbits from JP Morgan, and I thought I’d share them with you.
Let’s start here: If our democracy truly falls apart, none of the rest of this probably matters. Let’s assume for now that doesn’t happen.
Here are some guidelines about investing during an election year.
- Don’t let politics overrule how you think about investing. When you look at Americans’ economic attitudes, Democrats tend to feel better about the economy when there’s a Democratic president and Republicans feel better about the economy when there’s a Republican president. Investors behave based on their economic outlooks.
However, political thinking does NOT always align with investment returns.
The market’s annualized returns were up 16% during the Obama and Trump administrations, compared to 10% annualized over the last thirty years. Investors could have missed out on above average returns if they went to cash because they didn’t like who was president.
- The macro environment usually drives returns. What the Obama and Trump administrations shared during those 16%-return years was ultra-low interest rates, which had a greater effect on earnings and market returns. Presidents rarely have that much influence on the market.
- Markets don’t like uncertainty and election conclusions reduce it. Since the 1930s, the average returns tend to be a little lower during election years. Volatility is generally higher.
But averages never tell the full story. There are notable exceptions — the 2000 election saw the tech bubble bursting, the 2008 saw the onset of the financial crisis, and the 2020 election had to deal with the pandemic. None of these drops in the market had anything to do with the president or the election.
Markets like stability. Once the anxiety of who is going to president subsides, the markets tend to rally.
Generally speaking, there are more market jitters in the first three quarters of an election year (median returns of 1.9%) and then relief in the fourth quarter (median returns of 3.4%).
- Market timing during an election year is just as hard as any other time.
Lots of investors think, “well, I’ll get out of the market, wait for the election to be over, and then get back in.” That strategy for the last two elections would have reduced returns.
In 2016 when Trump won, the market went way down the day following the election but was up 1.1% by the end of the trading day.
In 2020 when Biden won, there was almost a week before we had a winner declared and the market was up 4.2%.
In both elections, there was a pre-election rally beforehand. Investors getting in after the election would have missed those rallies.
- Policy impacts the markets far more than politics.
Monetary policy, the labor market, profits, and valuations are far more instructive than who’s in the White House.
However, there is typically significant lag time between when policy is enacted and when the effects are realized, positively or negatively.
Despite a president’s best intentions, policy doesn’t always have the intended consequences.
Great example: During the Trump administration we had relatively supportive policies toward fossil fuel and traditional energy. During the Biden administration you had less supportive policies and instead we had the largest federal commitment to renewable energies.
But what played out was exactly the opposite. During the Trump administration, traditional energy was down 40% and clean energy quadrupled. During the Biden administration, traditional energy has doubled and clean energy is down about 50%.
Why?
During the Trump administration, the pandemic happened and the cost of oil went down to $11/barrel. Rates were almost zero, which benefitted new business and innovation in clean energy.
During the Biden administration, there was the recovery from the pandemic (oil prices rebounded), the onset of the Ukraine war (energy prices spiked), and the traditional energy companies were monitoring how to invest going forward, which had them tighten supply, causing prices to go higher. The Biden administration also saw the biggest and fastest rate hike series in history, which cause new business to scale back in innovation.
A lot has to go right for a policy to succeed. The right president has to be in office, there has to be support in Congress (usually a sweep these days), and an agreement within their party. The recent political polarization of politics makes this harder.
- Very little gets done in Congress during election years. Most of them are gone after about July. They’ll be back in their home states campaigning for themselves and/or other races. As a result, there will be little legislation passed.
- There is also likely to be a divided Congress after this election. And Congress has big fish to fry. The federal debt is going to be an issue. We either need to cut spending or raise taxes. There’s not a lot to cut unless we look to Social Security and Medicare.
Republicans are going to want to extend the 2017 Tax Cuts and Jobs Act, but that adds $3T to the deficit (yes, that is a T for trillion). Democrats are less willing to extend those cuts but will want more spending.
We need a solution and it’s an expensive fix no matter what. These issues are easy to talk about on the campaign trail. They are much harder to legislate, especially since there’s not much agreement even within parties.
- Markets and the economy do well under all configurations of government. The economy since WWII has grown 2.7%. The markets on average are up an annualized 8.3%. This happens even with divided governments (one party in the White House, another controlling Congress), which is the most common configuration.
- Past Performance is not indicative of future results. History is rarely repeated in the future, but it does often rhyme. Just because something happened last year doesn’t mean it happens this year. But I wouldn’t be the least bit surprised this year’s markets rhymes with last year’s – a little icky for most of the year and a nice little rally at the end.
TL;DR: Don’t get derailed by headlines or proposed presidential policies or polling. Regardless of who wins, staying invested is how you win.
If you want to talk politics, please find your nearest media outlet. If you want to talk investing, please reach out.
Lanning Financial Inc. is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.
