As we move ever closer to November 3rd, the 2020 presidential election is once again shaping up to be a polarizing event for our country. To top it off, the impacts of COVID-19 bring new challenges regarding the voting process and its integrity, due in part to an election that will involve the widespread use of mail-in ballots. Since these ballots are only required to be mailed in by election day, it creates a very real possibility that we will not have a clear election result on November 4th.
Whether your potential concerns stem from the perceived direction of our country, or the uncertainty of how long it may take to know who will be leading us in this direction, the election is leaving many with feelings of anxiety and uncertainty. These same emotions naturally spark questions like, “How does this impact my situation?” or, “What if anything should I be doing differently with my investments in light of this upcoming event?”
Recent Historical Precedence
While each election is unique, in part due to key social, political, and economic issues prevalent at the time in our society, we can look back as recently to the 2000 Bush/Gore election and the “hanging chads” incident for some historical perspective. During this election, the vote in Florida was so close, with the outcome of this state ultimately determining a winner, that a re-count was demanded. The country did not know the outcome of this election until a Supreme Court ruling on December 12th of that year. Unsurprisingly, the uncertainty created increased volatility in the global stock markets, especially in the first few days after the election. However, during this month-long “limbo period,” the overall decline in the S&P 500 Index was just 4.2%, with the lowest point occurring at the end of November, down about 8%.
Longer-term Historical Precedence
Looking deeper, there are often concerns expressed about the stock market experiencing poor returns during presidential election years. However, going back to 1896, the Dow Jones Industrial Average has been up about 7%, on average, during presidential election years. This is in comparison to about 11% in the year before the election and about 3% and 5% average annual returns in the first two years of a president’s term following the election.
Another question is whether one political party is better for the stock markets than the other. Yet, the annual performance of this same index going back to 1900 shows the annual return for stocks averaged almost identically 8% regardless of which party was in control of the White House.
Interestingly, regardless of which party is in office, the amount of uncertainty created by a divided government has had the most impact on stock market performance. Looking at returns in the two years after an election dating back to 1928, the S&P 500 Index has returned the highest, on average 16.9%, when one party had control of the House, Senate, and the White House. Similarly, returns averaged 15.6% when one party had control of both the House and Senate while the other party had control of the White House. It was only when there was divided Congress, where one party controlled the house and the other the Senate, that returns averaged just 5.5%.
A Roadmap for the Near And Long-Term
Perhaps the most important takeaway from each of these data points is not the differences between the various scenarios, but rather that over the long-term all figures are positive numbers. It is a great reminder that each presidential election, like the news of many events, is short-term in duration. It is true that markets can and do sometimes have volatile reactions in the short-term due to perceived uncertainty, particularly if an outcome is unexpected. However, over the long-term, the growth of corporate earnings is what ultimately lifts stocks higher and this earnings growth has persisted through many different political and fiscal regimes.
While the odds of a significant negative market event as a result of the upcoming election are relatively low, even if it feels like “this time it’s different”, RTD’s disciplined investment approach is designed to take advantage of any longer-term opportunities created by a shorter-term fluctuation in prices. Through a dedicated investment team, technology and diligent monitoring, we review every client’s portfolio daily, always ready to capitalize on opportunities that short-term market volatility creates. For those taking withdrawals to fund ongoing expenses, we have an individualized liquidity plan to fund these needs for up to five years before running the risk of selling a stock investment that might be temporarily down in value.
RTD’s clients have a financial plan coordinated with a disciplined investment approach. The upcoming presidential election should not have a material impact on your long-term financial situation regardless of who wins or how long it takes to determine the winner. While news headlines and media attention may tempt your emotions, unless you have a significant need for cash that we’ve not already planned for, the election does not warrant any changes to your long-term investment plan.
As always, we encourage you to call us if you have questions or want to discuss your individual situation further.
RTD Investment Policy Committee