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Every four years, it’s the same old story. This will be “the most important election of our lifetime!” Heard that one before? Well, that year is here, and let’s look at what an election can do to your investment portfolio.
John Loyd
Elections can be stressful. The concern over whether your particular candidate will win is real, and so is the distraught and anxious feeling for some if the outcome is not as desired. However, when it comes to who is president of this great country of ours, the stock market just doesn’t care too much. I’m not suggesting for one second that presidential elections do not matter. They obviously do, but whether a donkey or an elephant is in the White House, the world will keep on spinning.
The day after the election, people will still be ordering through Amazon, buying groceries at Walmart and bags of mulch from Home Depot, while driving a Tesla to pick up Starbucks on their way to work. My bold assumption is that the world will in fact keep on spinning, and American companies will adapt — to whomever is president — and continue to prosper over time.
However, the road leading up to the election will be treacherous and not for the faint of heart. Given the candidates’ vastly different positions on major issues, it will be another divisive and contentious ordeal. We have already had an assassination attempt on one of the candidates, and the brutal, negative ad campaigns will continue.
Volatility in the stock market will likely increase.
Since 1950, volatility in the stock market (measured by dispersion of returns) is about 25% higher during election years between July and November over non-election years, according to LPL Research. The good news is that although there may be heightened volatility during election years, it often coincides with more frequent gains when compared to non-election years. Long story short, buckle up, though, as it could be a wild ride.
With social media and everyone an “expert” these days, the screaming nonsense will be difficult to ignore. Billionaire Mark Cuban, leading up to the 2016 presidential election, was very vocal that “If Trump wins, no doubt in my mind the market tanks!” Many other “experts” shared this same sentiment. During Trump’s tenure, the S&P 500 was up 67%, for an annualized double-digit return over the four years. Fast forward to 2020, where Trump stated if Biden were elected, there would be a stock market “crash you wouldn’t believe!” As of this writing, since Biden took the helm, the S&P 500 is up considerably, likely also achieving similar average double-digit annualized returns like under Trump.
Every four years, I also hear some version of, “If ____ (just pick the party you oppose) wins, things are going to be bad! I’m selling all my stocks!” However, when looking at the data, if the stock market were your only barometer, you would take either party, as equity returns over any presidential party in office are most often positive. In fact, much to the surprise of many, the stock market has typically performed better under a Democratic president.
Again, elections matter, just not as much for the stock market as one would think. I would always wince when Trump would proudly proclaim while in office, “Look at your 401(k),” as if he alone was the mastermind. While the president himself — or herself — doesn’t have a lot of control over the stock market, that unfortunately does not stop them from taking credit if it is up, or casting blame if it is down.
Years ago, my parents were at a garage sale and noticed an old copy of the Wall Street Journal for sale. Knowing my nostalgia for all things finance, they inquired from the gray-haired, elderly gentleman what he wanted for the old newspaper.
“I’ll take a quarter,” he said.
The newspaper, which is hanging in my office, is dated March 25, 1937. The Dow Jones Industrial Average, a broad and closely watched measure of the stock market, closed that day at 184. Since that time, the presidential race has been about even. We have had 10 Republican presidents and 12 Democratic presidents. The Dow Jones average is now around 40,000. Cue the adage here of, it’s time in, not timing the market, that matters.
Remember, hating the government or despising a political party is NOT an investment strategy. Even if you knew today who would win the election, that probably should not warrant a drastic change to your investment plan. Tune out the noise. Realize uncertainty and controversy are intertwined in most every presidential election. Focus on what you can control and your own financial goals.
History doesn’t necessarily repeat itself, but as Mark Twain said, “It often rhymes.” So, see you in another four years, when we will undoubtedly have “the most important election of our lifetime.”
John Loyd, CFP®, MBA, EA is founder of The Wealth Planner™. For over two decades he has been providing wealth management advice to small business owners and high-income professionals. Contact him at [email protected]. Securities & Advisory Services offered through LPL Financial, a Registered Investment Advisor. Member FINRA/SIPC. All investing involves risk including loss of principal. Past performance is no guarantee of future results. No strategy assures success or protects against loss. All indexes are unmanaged and cannot be invested into directly.