What a year 2020 has been, first a pandemic that brought about a global world economic shutdown and now we face not only cooler temperatures but also a very heated Presidential election. As we climb out of 2020 and look ahead into 2021 here are some important things I want to highlight regarding elections.
In a recent article from Capital Group on September 16, 2020 they analyzed over 85 years of data in “How Elections move markets in 5 Charts.” I want to highlight some of the most important take-aways from the article.
How much do elections TRULY impact the stock market and portfolio returns? Should elections even matter if we are investing for the long term?
1) Markets have tended to predict election results
“A simple stock market metric has correctly predicted the winner in 20 of the last 23 presidential elections since 1936 — a track record that might make even the top pollsters jealous. If the S&P 500 Index is up in the three months prior to Election Day, the incumbent party usually wins. If markets are down during that period, the opposing party typically claims victory.
Why is this? It’s because equities tend to look ahead and “price in” uncertainty — including that caused by an upcoming election.”
As scary as the market volatility might be remember it’s not about market timing. We are investing for the long-term. Historically, whether the incumbent wins or loses, election market volatility has typically been short lived and the markets tend to stabilize and turn upwards.
2) Gridlock or sweep? Equities have gone up either way
A major concern of this election for investors is the impact of a Democratic sweep of the White House and Congress. While a new party typically brings their own agenda and policies, historically speaking stocks have done well regardless of the composition of Washington.
“Since 1933, there have been 42 years where one party has controlled the White House and both chambers of Congress at the same time. During such periods, stocks have averaged double-digit returns. This is nearly identical to the average gains in years when Congress was split between the two parties.”
3) Markets have trended higher regardless of which party wins the election
I know how difficult it can be to tune out the noise especially this year. I encourage you to focus on the long term. Historically speaking elections have made essentially NO difference when it comes to long-term investment returns.
4) Investors often become more conservative in election years
In today’s environment, we are constantly bombarded with messages about the election and most of what we see and hear is negative. It can be difficult to have a positive outlook but it is important to not let our emotions control our behaviors. Keep in mind that together we have built out an investment portfolio that is well diversified, allocated to your investment risk tolerance and overall financial goals.
5) Moving to cash in election years can reduce long-term portfolio returns
According to a study by Capital Group “The investor who stayed on the sidelines had the worst outcome 16 times and only had the best outcome three times. Meanwhile, investors that were fully invested or made monthly contributions during election years came out on top. These investors had higher average portfolio balances over the full period and more frequently outpaced the investor who stayed in cash longer.”
I hope this can give you some sense of security in knowing that despite what happens in November so much of the election is out of our control. What we can control is staying the course, trying to tune out the negativity and focus on our goals.
As always, if you have any questions please, do not hesitate to call or reach out to me.
Capital Group American Funds. September 16, 2020 https://www.capitalgroup.com/advisor/insights/articles/how-elections-move-markets-5-charts.html?sfid=1067298871&cid=80190104&et_cid=80190104&cgsrc=SFMC&alias=A-btn-LP-2-getinsights&Et_mid=10768262&l=31996630_HTML&u=766790597&jb=194.