Most everyone is tired of hearing about the election. We are too. Still, considering the event’s significance and our conversations with worried investors, we want to share some thoughts and information.

There are three main concerns we hear:

1. An expectation that volatility will spike around the election

2. How policy changes or election chaos may affect the market

3. A general fear about the future, across the political spectrum

Our responsibility is to act in our clients’ best interests. To do so, we strive to be apolitical. Politics are a potentially harmful bias to introduce into investment decisions.

Nonetheless, politics, like the economy or inflation, is part of the investing landscape. We have a responsibility to study its potential impact and the effect it may have on our portfolios.

From our apolitical perspective, we’ve organized our thoughts into the following categories:

A.     Markets in Election Years

B.     “This Time Is Different”

C.      Politics Is a Minor (Not Major) Variable

D.     Expand the Time Scope

1. Markets in Election Years

Our first stop with any issue is the data. What do presidential election years tell us about the markets?

First, let’s look at volatility. Per the next chart, by measuring day-to-day market fluctuations, the market has on average been calmer as political drama reaches its apex. Despite the anxiety and uncertainty that elections breed, there appears to be no corresponding market agitation.

Nor is there anything special about election year returns. Over 40 presidential elections, the market performs similarly in election years as in non-election years. And there is no pattern to election year monthly returns either, i.e. there is no time of the year when the market performs noticeably better or worse. 

The market data is similar with Democratic vs. Republican presidents, divided party governments vs. unified governments, victorious incumbents vs. challengers, etc. No matter how you slice it, there is no information for election year investors to use as a call to action.

B. “This Time Is Different”

The obvious response to the data is – that’s nice, but have you ever seen an election like this?!

It’s often said that the four most dangerous words in investing are “this time is different.” Investors who ignore that wisdom throw out time-tested investment principles in favor of popular trends. That approach typically does not end well.

Still, there are times when circumstances are indeed different. Past pandemics – e.g. Swing Flu, Ebola, etc. – showed no noticeable impact on market returns. Yet, in March, COVID caused the fastest 30% market decline in history.

During the “hanging chad” Bush v. Gore contested election of 2000, the S&P 500 fell 4.2% from November 7 until the Supreme Court’s December 12 ruling. While that’s a poor one-month return, the decline occurred within a bear market that saw the S&P fall 47% from its peak during the dot-com crash.

It’s hard to know how much of the one-month decline to attribute to the election. Besides, a sample size of one should not lead to any conclusions.

Still, recall the confusion and uncertainty of Bush v. Gore. Alarmists often cite the adage that markets don’t like uncertainty. That may be true. Still, history suggests that the downside risk may not be as extreme as they imply.

Moreover, market prices factor in all available information. The 2000 drama took the country by surprise. Here, everyone is talking about the potential for post-election drama. Stock prices are forward-looking and likely already reflect, at least in part, that concern.

C. Politics Is a Minor (Not Major) Variable

Governments affect stocks in obvious ways. First is by ensuring order. Through a functioning rule of law, property rights, enforceable contracts, and a legal system to resolve disputes, companies can function within guardrails.

Second, there is the policy environment, i.e. tax, economic, and regulatory rules that every company must operate within.

Per that second category, we hear too many people draw inevitable conclusions from policy proposals to benefit or harm to the market.

Consider what must happen for investors’ political hypotheses to bear fruit. They must handicap the presidential and congressional results, predict key policy priorities, evaluate the likelihood of them becoming law, estimate the economic impact, and figure how much market prices may reflect the result.

Sometimes the expected political result transpires, but the anticipated market result doesn’t. Capital gain taxes increased in 1986 and in 2013. Neither rise derailed bull markets. After President Trump’s election, many expected energy and financial stocks to prosper in a deregulatory environment. They were two of the worst performing sectors.

The reality is that politics play a minor role in markets. Politicians are like sports referees. Sports fans and investors tend to attribute a much greater role to referees and politicians than their roles warrant. Referees have an important effect, but ultimately the players on the field determine the outcome.

Also, while politics can seem all-consuming as an election nears, the day-to-day focus for millions of U.S. businesses isn’t politics. It’s on building a better product, improving customer service, and making smart decisions. Corporate America will innovate and maximize profits regardless of which party controls Washington D.C.

The world is full of variables. It’s unwise to assign too much influence to one. Whichever party is in control, a non-political event – like a major invention or the pandemic – is likelier to have a significant long-term impact than an election.

D. Expand the Time Scope

Data shows and anecdotal evidence confirms that election year investors are likelier to remain in cash. This is understandable.

The negativity surrounding presidential elections – focus on the country’s problems, anger-inducing campaign rhetoric – drives investors to pessimism. Moreover, investors tend to shy away during periods of uncertainty.

To combat that pessimism, investors should expand the time scope. 

First, let’s look at the performance of three approaches for a four-year period starting with an election year: (1) be fully invested, (2) invest gradually over the first ten months, and (3) wait until the following year to invest.

Being fully invested was the approach with the best average result and was most frequently the best outcome. By far, the worst average result and most common worst outcome was to “sit on the sidelines.”

Second, let’s zoom out to ten-year periods. Over the last 19 elections, only once has the ten-year return on an election year investment ended up negative. With fifteen of those starting points, investments more than doubled.

Third, let’s go back to President Franklin Roosevelt. A $1,000 S&P 500 investment in 1933 would be worth over $10 million in 2019 (yes, this math is real and amazing!). That growth happened through both parties’ presidencies, yo-yoing tax rates, wars, a Great Depression and Recession, and myriad crises.

Most investors should have at least a ten-year perspective if not a multi-decade one. Over the long term, politics can be counter-productive and costly noise.

E. Takeaways

We don’t mean to dismiss election fears. While elections have implications for markets, they have not been major differentiators or drivers of long-term returns. Worse, they may impair decision-making. Many other factors and events impact markets more.

Still, election fears symbolize a principle of our portfolios. We build globally diversified portfolios with stocks from dozens of markets. We do so, in part, to guard against very unlikely, but real risks that a single market may present.

We encourage you to find a way to avoid the extraordinary noise surrounding us now. If you are concerned, please reach out so we can discuss more.