Investing During Election Years

Every four years the following statement is said regarding every candidate: "If X person wins, the market will go up (or down)." It's said with confidence about both Democrats and Republicans. It's often followed by, "this time is different..."

That said, here are the returns of the S&P 500 during election years:

Year Return Candidates

1928 43.6% Hoover vs. Smith

1932 -8.2% Roosevelt vs. Hoover

1936 33.9% Roosevelt vs. Landon

1940 -9.8% Roosevelt vs. Willkie

1944 19.7% Roosevelt vs. Dewey

1948 5.5% Truman vs. Dewey

1952 18.4% Eisenhower vs. Stevenson

1956 6.6% Eisenhower vs. Stevenson

1960 0.50% Kennedy vs. Nixon

1964 16.5% Johnson vs. Goldwater

1968 11.1% Nixon vs. Humphrey

1972 19.0% Nixon vs. McGovern

1976 23.8% Carter vs. Ford

1980 32.4% Reagan vs. Carter

1984 6.3% Reagan vs. Mondale

1988 16.8% Bush vs. Dukakis

1992 7.6% Clinton vs. Bush

1996 23.0% Clinton vs. Dole

2000 -9.1% Bush vs. Gore

2004 10.9% Bush vs. Kerry

2008 -37.0% Obama vs. McCain

2012 16.0% Obama vs. Romney

2016 12.0% Trump vs. Clinton

As one can see, the political party that wins or loses doesn't necessarily matter when it comes to returns - but is this time different?

What are the factors to consider?

Delayed election results could lead to more volatility.

With the vivid memory of March 2020 lows in the stock market, investors might simply not even want to deal with volatility - therefore sitting on the sideline until the results are in. The problem is that we don't know when that will be. The 2000 election between Bush and Gore was decided by the Supreme Court on December 12th, 2000. That's more than a month after the polls closed. If there is a repeat of the 2000 election, one could imagine that more volatility in the stock market could take place.

Some added volatility could occur if one side declares victory too early OR doesn't concede when they should.

Every time a president has avoided a recession, they've been reelected.

Only one, Calvin Coolidge, went on to win when there was a recession in the two years leading up to the election.

This one is interesting - one could argue that the government (and Fed) knew they would cause a recession by shutting down the economy. Therefore, they got in front of it early by adding money into the economy to keep it afloat.

Is this recession different? It puts one's mind into a pretzel. If the economy didn't shut down, it could be argued that more people would've died from Covid complications. If (when) the economy did shut down, it would (did) trigger a recession. This seems like a lose-lose scenario.

Remember, this is the media's Super Bowl.

On both sides, the media is incentivized by the number of clicks and taps they receive on their articles. With elections only being every 4 years, it's like their version of the Super Bowl. It's their time to produce content that gets the most readers to capture the most advertising dollars. The unfortunate part is that there is really no penalty for writing articles based on facts (from both sides!). It's literally a "misinformation for profit" business model. Just be aware of that and take every article with a grain of salt.

So what can you do?

Focus on what you can control, not what the talking-heads think will happen.

Remember that your plan shouldn't get changed based on something that happens every four years. You've experienced elections before and you'll experience them again. If your goals haven't changed, why should your plan change?

The stock market has gone up and down during all presidents, regardless of party (see chart below from Dimensional Funds).

Finally, here are some interesting stats (from Dan Clifton of Strategas Research Partners):

Since 1933, the highest returning partisan control combination for the S&P 500 has been a Democratic Senate, Republican House, and Democratic President where returns averaged 13.6% per year. In 2020, this would require a reversal for all three.

Our current mix of Republican Senate, Democratic House, and Republican President average a 10.8% return. This combination is likely if President Trump wins reelection.

Under a Biden victory, the likely scenario is a Republican Senate, Democratic House, and (of course) a Democratic President. Interestingly, this combination has not occurred since Grover Cleveland in the election of 1886!