Client Memo: What To Do with Portfolios Ahead of the Election

As we approach the upcoming presidential election, I want to address any concerns you may have about its potential impact on your investments. 

I’ve received several emails asking what we are doing ahead of the November 5^th election.  The answer is simple:  NOTHING!

There is a general rule of thumb that is worth noting:  Keep politics out of your portfolio. 

We see the same theme every four years.  Investors become a bit anxious and worried about the upcoming election.  What if their candidate loses?  Clearly the other candidate will destroy the country and thus, the stock market!

What the markets and investors dislike isn’t one particular candidate but uncertainty, and that there is an actual outcome. 

However, the actual outcome of the election is almost immaterial to your wealth, long-term.  Even specific sectors can violate perceived truths. 

Here’s a great example.  As Vice President Harris has come up in the polls, solar and other ‘clean’ energy stocks have rallied while some fossil fuel stocks have fallen.  But if you bought ‘clean’ energy stocks following the election in 2016 when President Trump came into office, you would have outperformed ‘traditional’ energy stocks by a whopping 43% per year! 

Conversely, if you bought ‘traditional energy’ when President Biden was elected four years later, you would have outperformed ‘clean energy’ stocks by 53% per year!

Rather than political policy, markets were focused on the growth and earnings fundamentals of these sectors, which tend to be bigger performance drivers.^[1]

Here is What to Remember

The stock market has increased under every political combination in Washington and no rule of thumb exists for doing better.  The economy has grown regardless of which party controls the White House and Congress.

Want to see a cool chart that confirms that? 

The chart on the left shows what your $100,000 would have done since 2013 if you invested under only Republican Presidents and only Democratic ones.  You can see they end at almost the same level while being ‘fully invested’ performs substantially better.

How about we go back further.  The chart on the right goes back 70 years.  To make the numbers simpler, it assumes just $1,000 is invested.  You can see over this time frame, Democratic administrations tend to do slightly better than Republican but neither does anything remotely close to being invested when both parties are in power.

While political leaders may enact laws and regulations in hopes of influencing economic growth, the results are not nearly as predictable as they might imagine. Economic indicators such as jobs, interest rates and inflation can sometimes run counter to prevailing policies. 

In reality, the Federal Reserve has FAR more of an effect on the economy and markets than which party controls the government.

Presidential Election Years Tend To Be Good One’s!

As this year has helped confirm with the S&P 500 up ~23% at the moment, the fourth year of the election cycle tends to have the best median total return of any of the election cycle.  

²

Yale Hirsch in the “Stock Trader’s Almanac,” originated the ‘presidential election cycle theory.’  It suggests that U.S. stock markets tend to follow a predictable pattern based on the four-year presidential election cycle.

According to this theory:

• Year 1 (post-election year): Markets often experience a dip as the new president implements policies and reforms. Investors are cautious due to uncertainty about the new administration’s economic agenda.
• Year 2 (midterm election year): Market volatility typically increases. Historically, this year has been the weakest in the cycle as midterm elections create political uncertainty and potential legislative gridlock.
• Year 3 (pre-election year): This year is usually the strongest for the stock market. Presidents often push for policies that stimulate the economy and improve market performance to boost their re-election chances or their party’s prospects.
• Year 4 (election year): Market performance can vary. During this time, investors react to the election campaigns, candidates’ platforms and potential changes in economic policy.

Analysis by T. Rowe Price this year found some evidence to back up elements of presidential election cycle theory.^[3] It found that stock market returns six and 12 months after Election Day were meaningfully lower than in corresponding periods for years without a presidential election. This tracks with Hirsch’s theory that during a post-election year, markets often experience a dip as the new president implements policies and reforms.

While elections can cause short-term market fluctuations, they typically don't lead to prolonged volatility. In fact, market volatility often decreases after elections as political uncertainty subsides.^[4] This pattern of reduced post-election volatility has been consistent across multiple election cycles.

While it's natural to feel concerned about potential market impacts during election years, history shows that elections have minimal long-term effects on market performance. I encourage clients to maintain their long-term investment strategy and avoid making impulsive decisions based on short-term political events.

By presenting this information, I hope our clients understand that election-related volatility is normal and typically short-lived, reinforcing the importance of staying the course with their long-term investment plans.

As always, we're here to discuss any concerns you may have about your investment strategy. Do not hesitate to reach out if you'd like to review your portfolio or discuss your financial goals.

Please consider forwarding this on to your friends and families.

Sincerely,

Mark J Asaro, CFA

^{[1] https://www.edwardjones.com/us-en/market-news-insights/guidance-perspective/2024-presidential-elections-stock-market-ejp}

^{[2] Source: Morningstar Direct, Slickcharts, Edward Jones. S&P 500 Total Return Index. Past performance is not a guarantee of future results.}

^{[3] https://www.troweprice.com/financial-intermediary/us/en/insights/articles/2024/q2/how-do-us-elections-affect-stock-market-performance.html}

^{[4] https://www.bankrate.com/investing/election-year-stock-performance/?tpt=a}