Fall in Ohio is a magical time, isn’t it? The heat of the summer is dissipating yet the sting of winter’s cold days is far enough off that we aren’t yet worried. There is no greater place to spend your September and October months than in this beautiful state watching a high school football or soccer game. However, once every four years the beauty of God’s creation here in Ohio comes under a little stress as one of the great battle ground states in the Presential election.
That often leads to a series of questions from clients around, how should my investment strategy change during an election year? The perception is, because there is uncertainty and perhaps a new President that you may or may not agree with, that will crash the stock market and along with that crash, you’ll see your savings drop. As an advisor to many families across Ohio, South Carolina, Georgia, Florida and Texas, we as a firm need to understand if this assumption is reality and if so, how should we react. This article hopefully helps you to see our perception of the election and stock market.
Studies on Election Years and Market Returns
Dimensional Funds, a respected fund company, based out of Austin, Texas did a study in 2019 showing that the stock market has been positive overall in 19 of the last 23 election years from 1928-2016. We have posted the chart below that shows the S&P 500 total returns during each election year dating back to 1928. The most recent examples of a negative stock market annual return in an election year, have been in 2008, which was not the result of an election but rather the result of a global financial crisis brought on by the one thing that we hate more than anything DEBT! The second most recent example of a negative total return for the S&P during an election year, was the 2000 election which featured President Clinton’s VP in Al Gore and his Republican counterpart, George W. Bush.
More academic research on the topic, by Yale Hirsch, who wrote the book, The Stock Traders Almanac, and furthered by Pepperdine professor Marshall Nickles in a paper called, “Presential Elections and Stock Market Cycles,” has presented data that shows it’s actually best to invest on Oct. 1st of the 2nd year of presential term and sell on December 31st of year four. Therefore, their research says, don’t sell out during the election year because it’s part of what has historically been some of the best years of a President’s term.
Furthermore when studying returns, data does show that returns are better in midterm election years as opposed to non-midterm years and I believe this is very explainable in the fact that the stock market doesn’t like uncertainty, so when the leader of the free world is somewhat uncertain (although narrowed down to two people) that would generally impact returns. Notice, I didn’t say, that non-midterm years were negative though. Therefore should you sell out of your investments just because the returns are not as good as they’d be in another year? Certainly Not!
You Can’t Outsmart the Market
Dave Ramsey says the best book for investing is Aesop’s Fable, The Tortoise and the Hare. Why? Many of us get sidetracked from our investing strategy from all these outside issues that may or may not have an impact on the market. The bottom line, many times is, if we held to our strategy, we’d do better than trying to outsmart the market. One question, you could honestly ask yourself, in March of 2020, if I could have pushed a button and said I’ll just take a 0% return for 2020 as opposed to the negative return your statement was showing at that point, would you have taken it? Many probably would, however had you stayed true to your strategy today you’re in a much better place, just six short months later. It’s hard to time, outsmart and be better than the market because there are so many factors you can’t anticipate.
As you’re probably reading or hearing, the Presidential race is tight and as of today there is no clear-cut winner. Don’t let that impact of what-if’s, maybe’s or that might happen, effect the strategy you have in place for your family’s financial future. Market drops will always happen, Presidential election or not, thus your primary concern when investing should be your goals and objectives for your money, not who is moving into or out of the White House. Dave Ramsey always says, you control your outcome not the President so don’t let them dictate your investment decisions.
