US Elections and Market Returns

Should you be changing your investment strategy based on what the outcome of the U.S. election next week is going to be?     I'm going to walk you through some of the reasons why I don't think that the outcome of the presidential election should impact your investment decisions.

So the first reason is that there's not a lot of signal in U.S. stock returns between things that happen in the market during an election year and things that are happening in the market after the election.  

If your question was - should I be changing my investment strategy now as we approach the election hoping that the markets will be different either better or worse in the year after the election - there's not a ton of signal in that data going back to 1926.  

The average return of the US Stock Market in an election year was 9.9% per year and the average return of the US Stock market (S&P 500) after an election year is 11.3% per year and I'm going to put a SlideShare in the notes below this video so you can see the skewness, the noisiness of the data set just give you an idea that there's not a lot of signal there. 

So if your decision was, hey I'm going to get out of the market now and I'm going to get back in once the election is past or vice versa, it's just not really a great strategy.  

The second major reason is that regardless of whether the president is a Republican or Democrat, there's lots of noise in the data around returns for different political parties being in power and I'll give you an example.

So in George W Bush's presidency, he came in as a very conservative free market Republican president during his presidency.  The average annualized return of the S&P 500 was negative 4.4% over his two terms.

Barack Obama came in as a more Progressive Democrat and there was concern like, you know, is this going to be really devastating for the markets if Obama becomes President or is he going to raise taxes?  And in reality what happened was that while Obama was the president the US markets return average 16% per year annualized with no down years.

And so that you want to be careful with that too because that's not, in and of itself, it's own signal. It's not that you know, Democratic Presidents deliver outsized returns are in their presidencies, and there was something wrong with the Republicans or George W. Bush that created negative returns.

If you remember, there was just a lot more going on in the world during those times.

So George W Bush came in 2000 - 2001 in the depths of a recession United States, there was a Dot Com implosion.  Then when he left office, George W Bush, they were in the depths of the financial crisis, The Great Financial Crisis.   

Obama took over in office during the financial crisis. And there was a tremendous amount of recovery in the US Stock Market that carried through all the way up into the beginning of this year.

So I guess the point is that shareholders ultimately are invested in companies.  They're not invested in U.S. Presidents.  The second major takeaway is that Presidents are really only one factor. Political parties are really only one factor.

And what makes the price of stocks and bonds move around the world other factors include Innovation, health crises like we're having this year, interest rates, commodity prices.  There are tons of other factors that go into what happens with stock and bond returns.

So looking at an election trying to make decisions about your long-term investment plan based solely on the outcome of the election to me doesn't really seem like a great idea, and historically the data has shown that it's not really a great idea to be making decisions based on what you think is going to happen with the election.

So I hope you found this interesting.  I hope you find that the slides below give you some more insight to the impact of presidents on markets, and I hope you have a fantastic day.

Take care.

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Please consult with your financial advisor, tax professionals, and legal professionals before making any decisions.