The Markets & The Election

Andy Reynolds

  • No matter how you divide the historic political leadership landscape, at the end of the four-year cycle, the investment returns of the US markets are relatively the same.
  • The US markets have experienced significant growth with both Republican and Democrat Presidential leadership.
  • 10-Years after the first year of a new President’s term, in 100% of the cases the market is positive and in 79% of the cases the market value has more than doubled.

Like all past US Presidential elections, there is much attention being paid to both candidates, the potential political outcomes of either candidate’s victory, and the effects on the US stock markets.  No matter your political affiliation, I believe one thing we can all agree upon is that this election is important, and many will be paying close attention.  Political views aside, it is our job to understand the political environment, both historic and current, and to do our best to have a fundamental grasp on how politics and political outcomes affect the markets.  It is with this goal in mind, that today we share a historical view of elections and their impacts on the markets.

Long-Term Perspectives

Fundamental financial planning focuses on three main liquidity concerns in consideration of investment allocation: 1) liquidity for near-term financial expense surprises; 2) liquidity for near-term needs; 3) liquidity for the long-term.  Our foundation for investing is to take care of the near-term needs/surprises with low risk assets first and then to invest for the long-term with risk assets.  Said differently, everyone investing in marketable securities (the stock market) should maintain a long-term perspective when considering the markets.

With the long-term perspective in mind, American Funds researched 10-year market performance starting on January 1st of new Presidential terms going back to 1936.  In 100% of the cases, the US markets experienced positive 10-year returns following the first year of a new President’s term, no matter the political party.  Additionally, in 79% of the cases, the investment return more than doubled the initial investment.

Source: Capital Group (American Funds)1

 

The image below demonstrates a similar theme.  This chart shows the investment growth of $100 contributed back in 1929.  The image depicts the market returns during time periods of different Presidents and their political parties.  Without a doubt, two facts can be ascertained from this image.  Number 1) there is volatility no matter which political party is in the White House – we must expect and embrace volatility.  Number 2) with the long-term perspective in mind, the US markets have done well in most cases no matter which party is in the White House.

 

Source: Dimensional Funds2

 

Short-Term Differences, Long-Term Similarities

Fidelity completed an exhaustive study on the average growth of the US market over a period going back to 1789, the results are telling.  Depicted below, as one would expect, the average market growth continues to improve each year that the President is in office.  As time goes by, it allows the President to enact policies that the markets will generally like.  The data in blue is some of the most interesting data I have seen about political leadership makeup and markets.  What is interesting to note is that any short-term (first 2 years) momentum, or lack thereof, is largely lost by the time the four-year cycle is complete.  This is recognized in nearly all political outcomes across history.  No matter how you divide the political leadership landscape, at the end of the four-year cycle, the investment returns of the US markets have been relatively the same.  While the sample size is not large, this data can help add perspective and clarity to our investment decision making.

 

Source: Fidelity3

 

American Panic

Throughout history there have been many reasons to be concerned about the markets.  This election, COVID, unemployment, etc. is certainly noteworthy but these concerns are not the first time Americans have had face unprecedented challenges.  Keeping everything in perspective, let’s review a handful of moments throughout recent US history… Watergate, impeached presidents, the dot.com bubble, 9/11, the Financial/Debt Crisis, Chrysler/GM bankruptcy, Bank Bailouts, US Debt Downgrade, Fiscal Cliff, Flash Crash, US Government Shutdowns, Ebola, 2016 Election, US Trade War with China, etc.  Each of these moments were concerning and potentially derailing, yet we managed to get through them.  It is important to remember that Americans are resilient and innovative, it is what made America great and what continues to make America great.

It All Comes Back to Fundamentals

The conclusion of this commentary is that it all comes back to fundamentals.  If we take a long-term perspective, we strongly believe that the future is bright and America will continue to innovate, grow, and improve.  As I started this commentary, and as we have said many times over, we must account for our near-term liquidity needs/risks and then allow our long-term investing to be based on long-term fundamentals.  Volatility will come and go, it should be expected and embraced; it should not, however, cause us to panic or change our fundamental strategy for long-term goals.

 

Important Disclosure: Past performance does not guarantee future results.

1. https://static.fmgsuite.com/media/documents/7b1d8cef-5961-4adf-85d6-ff5084144869.pdf

2. https://www.dimensional.com/us-en/insights/how-much-impact-does-the-president-have-on-stocks

3. https://www.fidelity.com/learning-center/trading-investing/markets-sectors/stock-returns-and-elections

 

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