During our financial lives, we encounter many events that we think might interrupt our planning goals and disrupt our investments. Elections represent many of those events. This election season seems more contentious than ever. And we have media coverage of it everywhere. You can consume election content on television, radio, streaming, podcast, video and article content 24 hours/day. It doesn’t take too long to find someone who is declaring doomsday if one candidate or another wins.
Breathe. And, breathe again.
Although history doesn’t often repeat itself, it does provide useful context from which to draw factually based conclusions. And facts should drive your investment decisions, not emotion. So, let’s bust a few myths.
Myth: Stocks tend to decrease in value when one party (or the other) wins the Presidential election.
Fact: This hasn’t been the case at all. Going back to 1952, there have been two Presidential terms where stocks have decreased in value over their term: During the financial crisis during George W Bush’s second term and during the stagflationary spiral during Richard Nixon’s second term. 1
Myth: If one party wins the Presidential election, they will completely change the way the US economy works.
Fact: It is very hard to make significant changes to our economic system. We have a strong system of checks and balances including re-election of representatives every two years, Presidential term limits, and the Supreme Court. Since 1957, the proportion among business, government and consumer spending has remained very consistent, and the S&P 500 has grown throughout this time period. 2
Myth: If one party gains control of the White House, Senate and House of Representatives, they will be able to do whatever they want to our country.
Fact: Although this is possible, a look back at history doesn’t bear this out. It typically takes a lot of energy to get signature legislation into law, and voters often return to mixed party government (or at least they have the opportunity to do so) after 2 years. Even if signature legislation does pass, it doesn’t mean that stocks will be depressed – in fact, stocks did quite well for several years after the Affordable Care Act was enacted. 3
Myth: Stock market performance is a good indicator of who is going to win the election.
Fact: There is no science around this. In fact, a better indicator might be the misery index which is a combination of inflation and unemployment. Since 1961, when the misery index is high, the incumbent party lost the election. 4
Myth: Most Americans don’t like the current candidate for the (pick one) Republican/Democratic party. Therefore, if he wins, it means doom and gloom for my stocks.
Fact: Not according to history. Presidential approval rating doesn’t seem to have a scientific connection to stock market performance. In fact, some of the best years for stock markets occurred when Presidential approval ratings for the current President were between 35% – 50%.
This is a series about Situational Awareness and Action. The lack of Situational Awareness (SA) here centers on the potential impact of elections on your investments (or lack thereof). That many people draw incorrect conclusions about the impact of politics on their investments.
The problem is acting on incorrect conclusions, feelings about a particular candidate, or information about their proposed platform. The Actions you can take today are these: make sure you follow your disciplined investment process every day; have an investment strategy based on all four key dimensions; calm yourself by understanding that historically, elections don’t have as big an impact on investment returns as many think; and remember trying to move money into or out of the market based on what might happen around an election has a low probability of success.
Information in this material is for general information only and not intended as investment, tax or legal advice. Please consult the appropriate professionals for specific information regarding your individual situation prior to making any financial decision. No strategy assures success or protects against loss. Investing involves risk including loss of principle. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Wings Wealth Management, a registered investment advisor and separate entity from LPL Financial.
1 Sources: Haver. Invesco. 6/30/20. 1957-present. Stock market performance is defined by the total return of the S&P 500 Index.
2 Sources: FRED. Global Financial Data. 6/30/20.
3 Sources: Bloomberg. L.P. FRED. 3/31/20. Most recent data available.
4 Sources: Bloomberg. L.P., Haver Analytics, S&P, as of 6/30/20.