As if 2020 hasn’t been crazy enough, the election that is right around the corner might as well be the icing on the cake. Every four years, we have the opportunity to express our right to vote. Like clockwork, every four years, leading up to the election, no matter the party affiliation, the media deploys fear-mongering marketing techniques that inevitably impact the perception of the American people in an attempt to persuade us in one way or another. After all, persuasion wins elections. No matter the topic at hand, it is very common for people to develop a vision in their minds of what the impact on our society and financial system will be, based on who gets elected into office. As it relates to the stock market, while we do not discount the value system of each voter, and putting the party affiliations aside, the data tells us that it really doesn’t matter who gets elected or which administration takes over. The performance shows no pattern based on who is in office. How the stock market has behaved with each new president has more to do with luck, or in a couple of cases, unlucky timing than the actual president himself.
We can look at this data in a couple of different ways. The first is by reviewing returns of the S&P 500 during an election year. The data indicates that it is difficult to identify systematic return patterns during these years. As shown in the chart below, on average, the returns during each election year and the year after have been positive at 11.3% and 9.9% respectively.
The second way to look at this data is by looking at presidential terms. On average, the return of the S&P 500 during each presidential term has been 10.3% going back to 1929. There are a couple of unlucky presidents who experienced negative annualized returns during their tenure, but overall, the majority of presidents, both Democrat and Republican, have had terms in which the annualized return of the stock market was positive.
Rather than viewing the upcoming election as a looming crisis in the making, it is important to keep your eye on the prize and push all the short-term noise aside. Looking at the chart below, the growth of one dollar invested in January 1926 still shows an upward trending trajectory and is worth 10,000 x more than it was when initially invested regardless of who was in office. This speaks directly to the importance of staying focused as a long-term investor. There will always be a short-term event that appears to wreak havoc on our portfolios, but if we stay disciplined and treat the event as short-term noise, we set ourselves up for greater success in the long run.
It is very easy to get caught up in what we think might happen in the short term, especially during a year like 2020. The important thing to remember is that so many things influence stock prices and market returns. If your goal is to be a long-term investor, one of the prices paid is the price of uncertainty and risk. While we cannot predict what the future holds, the expectation over time is that your portfolio will grow no matter who is in power at the White House. Our goal at ML&R Wealth Management is to help our clients navigate these times and stay the course in order to prevent the derailment of their overall financial plan just because of a little short-term noise.
Below is a helpful video that talks you through the diagrams and graphs.
We are always here to help you with these topics and any other financial questions that you and your family may have. Please contact us with any questions.
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