What to Expect with a Stock Market After an Election
Ah, 2020: the year of pandemics, rollercoaster stock markets, and every other doom-and-gloom news story imaginable. Why is it not surprising that it’s also the year of a presidential election?
If you’re like most investors, you probably wonder what will happen to the stock market in light of the election. Will the outcome make a difference to your portfolio?
Let’s take a look at the historical performance of the stock market in election years, what it means for you—and what you should focus on.
How the Stock Market Performs During Election Years
Take heart. No matter what the financial pundits on TV say, most election years have shown positive stock market returns. In fact, only four presidential election years between 1928 and 2016 experienced net losses.
Source: Dana Anspach, “Stock Market Performance in Presidential Election Years,” The Balance, updated Sept. 2, 2020.
It’s not hard to explain those losses outside of the election:
In 1932, we were in the midst of the Great Depression.
In 1940, we were gearing up for World War II.
In 2000, the tech bubble burst.
In 2008, we experienced a financial crisis and the Great Recession.
And 2020 could make the list of down years, thanks to the COVID-19 pandemic.
So, for the most part, if presidential elections have any effect on the stock market, it’s usually a positive one. In fact, the average presidency tends to experience a four-year cycle, according to one Schwab study:
Year 1 sees average returns of 5.8%.
Year 2 sees average growth of 4.5%.
Year 3 is usually the strongest year, with average returns of 13.7%.
Year 4 sees average growth of 7.1%.
The Stock Trader’s Almanac creator, Yale Hirsch, referred to this pattern as the “Presidential Election Cycle Theory.”
Past Performance Doesn’t Guarantee Future Results
While this pattern is interesting, the fact that we’re living in unusual times underscores our regular mantra: Don’t make investment decisions based on past performance.
You’ll find any number of theories on the internet telling you when to buy and when to sell based on the presidential term. But what would have happened if you had followed such investment advice recently?
Both of Barack Obama’s terms had a worse third year than his first and second years.
Donald Trump’s first and third years showed gains, but his fourth year has seen losses so far due to the coronavirus.
If you had followed a strategy based on the year of a presidential term, you would have lost money.
While there are patterns that correlate presidential terms and market performance, in the end, they are not an investing strategy and, we would say, a gamble. As an investor, you’d be better served by ignoring presidential elections when it comes to your financial decisions.
Instead, use historical data to smooth out any anxieties you may have about the impact of November 2020 on your portfolio so you can stay focused on your long-term strategy.
Whether Donald Trump or Joe Biden wins the White House on election day, the age-old advice of investing still rings true: You are likely to do best with a diversified portfolio structured with long-term results in mind—not whatever happens in the next few months or years.
Set Your Sights on What You Can Control
While it’s easy to let yourself get carried away by what-ifs and speculations about 2020 election results, historical patterns, and the stock market, remember that you can’t control these things. No amount of worrying will change that.
Instead, as financial advisors, we like to advise this: Focus on what you can control.
You may not be able to influence national politics or the global economy, but you can manage your individual financial decisions. For instance, you can:
Set a reasonable budget for yourself to live within your means as much as possible
Identify short- and long-term financial goals and work with your financial planner to set up realistic action steps to get you there
Choose a diversified, low-cost, tax-efficient investment portfolio to minimize taxes and maximize gains without taking on unnecessary risks
Protect your family and yourself with appropriate insurance coverage and a regularly updated estate plan
Once you’ve done all you can to prepare yourself individually, it’s best to keep everything else in perspective.
After all, the U.S. has been through catastrophes, pandemics, and social unrest before—and we go through presidential elections every four years.
Source: Kristin McKenna, “Stock Market Performance by President (in Charts),” Forbes, August 12, 2020.
Regardless of how it may feel right now, the market historically has been on an upward trajectory despite which president is in office. Long-term investors tend to be rewarded—no matter the results of any individual election.
If, after reading this, you are still concerned about your financial outlook, you may want to talk with a financial advisor. Our Roseville, CA advisory firm recommends you talk over your concerns with a fiduciary, fee-only advisor. They will put your best interests first in any advice they give.
You may find that a long-term financial plan that incorporates all areas of your financial life, such as investments and taxes, will give you the peace of mind to weather any pandemics and elections to come.
Schedule a complimentary, 15-minute call with a fee-only financial advisor today to discuss your personal situation.
This material was prepared by Kaleido Inc. from information derived from sources believed to be accurate. This information should not be construed as investment, tax or legal advice.
Parkshore Wealth Management is a family-owned, independent, fee-only Registered Investment Advisor serving the greater Sacramento area with an office in Roseville, CA. We partner with financially responsible individuals and families who are eager to take positive steps that will allow them to use their money to build the life they desire. The firm is led by Harold Anderson, CFP®, and Daniel Andersen, CFP®, both members of NAPFA, the country's leading professional association of fee-only financial advisors.