In a year marked by uncertainty, it only makes sense that 2020 ends with a US presidential election.
With political ads in full swing, debates taking place, and investors predicting each candidate’s effects on the economy and market, many clients have asked how the election results may affect their portfolios in the coming months. Although it’s natural to seek a connection between who wins the White House and which way the stock market will go, should long-term investors let this election influence how they invest?
Let’s analyze a few different data points to help us come to a conclusion. First, and often most important to investors, is the performance of US stocks during election years.1 US Stocks have historically performed well during election years, with only four of the last 23 Presidential election years posting negative returns. On average, Presidential election years have returned 9.16% going back to 1928. What about the impact the election has on stock market performance closer to November 3rd? On average, the fourth quarter performance for US stocks in election years is 3.45% going back to 1924. Although this is slightly lower than the 3.73% fourth quarter average return in non-election years, it’s still much higher than the 1.45% average third quarter return going back to 1925. Historically, changes in America’s President haven’t adversely impacted stock market performance.
So now that we know elections’ impact on market returns has historically proven negligible, what about the impact on market volatility? Does the political sparring, election uncertainly, and horse-race nature of political campaigning mean that there is a noticeable uptick in market volatility around election day? The answer may surprise you. The short answer is no. From January 1, 1964 to December 31, 2019, the S&P 500’s annualized volatility was 13.8% in the 100 days before and after a presidential election, which was lower than the 15.7% annualized volatility for the full time period.
Elections are extremely important in upholding the U.S. tradition of democratic government, but for all their prominence in the news cycle, history suggests they shouldn’t sway your investment plan. We understand that this election may seem more important than past election cycles, , but whatever the outcome, we believe you will be best served focusing on the goals of your portfolio and its full time horizon compared to market performance over the next two months. We believe that by focusing on what you can control and bringing discipline to the investment process will best position your investment portfolio for success.