Investing Around Elections
Markets can be especially choppy during election years with sentiment often changing quickly. And this year’s election is obviously unique with the global pandemic and resulting economic downturn. As we get closer and closer to the election, investors are bound to worry more and more. What should investors do?
First, let’s provide some perspective. What you’re likely more worried about is the economic effects either candidate will cause. Remember, the President alone cannot simply impose their will. We have a system of government that requires the approval of the House and Senate. Getting anything done at all requires a great deal of compromise.
Let’s also take a look at the past. Research by Capital Group shows that equities have tended to increase regardless of whether a Democrat or a Republican is in the White House. Although past results are not predictive of future returns, a US$1,000 investment in the S&P 500 made when Franklin D. Roosevelt took office would have been worth over US$14 million today. During this time there have been seven Democratic and seven Republican presidents.
So, past U.S. elections have not affected long-term investment returns. Though it should be noted that if an investor reduced their market exposure to avoid a certain party or candidate entering the Oval Office, it would have negatively impacted their long-term returns.
Speaking of research, you may have read news stories saying that past elections reveal other insights. For instance, historically, if there isn’t a recession in the two years leading up to an election, the incumbent president will likely be re-elected. If the performance of the S&P 500 Index during the 3-month window leading up to election day is positive, the incumbent party has historically won. And, if an incumbent president is re-elected, the U.S. stock market performs better than if a new president is elected.
What should investors make of this? While these historical facts are interesting, you’ve probably noticed that the evidence we currently have on the first two insights are both pointing towards differentoutcomes. One points to a new party in power and the other points to re-election. Given the contradiction, investors are only getting more confused on top of their worry.
Therefore, investors’ best course of action is sticking with a well-planned long-term investment strategy based on their individual investment objectives. Whether that strategy is to be fully invested throughout the year or to consistently invest at regular intervals, the bottom line is that investors should avoid timing the market around politics. The key is to put aside short-term noise and focus on long-term goals.
Jim Hofheimer is Executive Vice President, Toroso Advisors
Feel free to contact us at (312) 445-6421
Important Disclosures:
The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.
All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.
Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve. Past performance is no guarantee of future results and the opinions presented cannot be viewed as an indicator of future performance.
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