Investing During an Election Year
Election season is often a stressful time for many Americans. If you’re feeling anxious this election year, you are certainly not alone. Whether you’re browsing social media, watching television, or just driving around town, you’re likely being exposed to a lot of negative information. We understand if these political advertisements have you worried. One of the biggest questions that we are receiving is how the results of the election may impact the stock market. You may be looking at your portfolio and wondering what kind of changes you should be making right now. Or maybe you’re considering exiting the market altogether and holding onto cash for now.
If you’re contemplating one of these options, know that investors who choose to time the market or invest around politics often underperform[1]. The truth is that the election results really don’t impact market performance all that much. Even though market volatility increases in the short-term during election years, it’s often short-lived [3]. Instead, you’ll discover that the stock market is rather indifferent to which party resides in the White House long-term.
To help illustrate this point, let’s review what has occurred in the past. Over the course of the last 20 election years, the S&P 500 index has only had negative returns twice, once in 2000 and again in 2008 [1]. In fact, stocks tend to provide even higher returns on average during election years. Since 1926, stocks have returned 11.6% during election years versus 10.3% during non-election years [2]. Of course, this is not without some hiccups along the way. As we mentioned earlier, volatility does increase at first, specifically during the first 5-6 months of the election year. However, studies show that volatility tends to return to more standard market levels during the second half of the year [2].
Some of you may be asking: what if this time is different? The economy is still working through the aftermath of the Covid-19 pandemic and tensions remain high in the Middle East and in Europe. Afterall, the world is dealing with some real issues right now, not just in America. While we cannot guarantee that history will repeat itself, our firm remains confident in our investment process and the risk mitigation strategies that we have in place. Each one of our portfolios has been stress tested to see how they would react in various financial crises. Furthermore, given the downward trajectory of inflation and recent improvement in the labor market, we believe that the current positioning of the U.S economy remains quite strong.
For our clients who still feel uneasy in the short-term, our firm recommends a three-bucket strategy (Now, Soon and Later Bucket). The “Now Bucket” is used by clients who need income within the next two years. Typically, this bucket consists of a money market fund that does not fluctuate based on market movements. This lowers the risk for those currently making withdrawals by protecting those distributions if the markets experience a downturn. For our clients nearing retirement or who will need income within the next 3-10 years, we would establish the “Soon Bucket”. This portion of the account is held in a low to medium volatility portfolio with a higher allocation towards bonds than stocks. Our third and final bucket, the “Later Bucket”, is established for funds not intended to be used for 10+ years and gives us the opportunity to remain growth focused with that portion of the account. We hope that this information helps to ease some of your concerns regarding the upcoming election and we encourage you to reach out with any additional questions that you might have.
1Capital Group. (2024). Guide to investing in a US election year. Capital Group. https://www.capitalgroup.com/intermediaries/au/en/campaign/guide-to investing-in-a-us-election-year/organic.html
2Peterson, M. (2024, February 16). How the U.S. election may impact your portfolio. BlackRock. https://www.blackrock.com/us/financial professionals/insights/investing-in-election-years
3Nagulapally, D. (2024, September 16). Navigating uncertainty: How to stay calm in election years. J.P. Morgan Private Bank U.S. https://privatebank.jpmorgan.com/nam/en/insights/markets-and-investing/ideas-and-insights/navigating-uncertainty-how-to-stay-calm-in-election-years