Broker Check

what changes should I be making due to election year politics?

July 27, 2020

You would have to be living under a rock to be unaware of the intensity and divide politics are having on our culture and communities currently. Everything has become political, even wearing, or not wearing a mask is taken as a political statement. However, to answer the above question you should not make changes due to election year politics. Not if you are already invested according to your goals, aversion to risk, income, liquidity needs and any other factors to be considered.
The inevitable questions are should I put all my money into cash? Should I put all my money in gold? No one has a crystal ball and predictions of black swan events are less accurate than a stopped watch. If we use historical market data, then the answer is a resounding no.
The Stock Trader’s Almanac informs us that since 1833 the Dow Jones Industrial Average (DJIA)has an average return of 10.4% the year before an presidential election, a 6% return the year of the election, 2.5% the first year of a new term and 4.2% in year two. Of course, those are averaging returns over 187 years, but these numbers should not instill fear.
Since 1952, the DJIA returns have averaged 10.1% when a sitting president is running for reelection. The same period shows a -1.6% decline during election years with an open field. Popular thought amongst economists, is that there is less uncertainty with the incumbent because they are signaling their tax and regulatory policies which influence the markets (source: Stock Market Almanac). This is more important than the color of their party flag. Markets like certainty and dislike uncertainty.
Something more telling is whether we have divided or united government. InvesTech provides us with numbers of three differing scenarios dating back to 1928. When one party controls the White House and both houses of Congress the S&P 500 averaged a 16.9% return. When one party controls both houses of Congress and the opposite party the White House, returns drop slightly to 15.6%. When the House and Senate are divided the returns drop to 5.5% suggesting gridlock in the Congress does not benefit investors.
Goldman Sachs research team reports that S&P 500 returns over the three months prior has been one of the most accurate election predictors. Since 1928, in twenty out of twenty-three election years the presidential incumbent has won when the market was up for the three months prior to the election. That is an 87% accuracy! Game on in September.
The bottom line for a long-term investor is to have a plan and stay the course. Meet with your advisor regularly and keep your plan on track making the necessary adjustments as your personal financial situation dictates. So please take the emotion out of your decisions and vote in November. Until we talk again, be well.