By: Dave Harris, CEO
When it comes to this year’s election, it is important to keep a big-picture perspective. While it is true that the equity markets underperform slightly in general election year, it is typically such a small change that long-term concern is unwarranted.1
In any given 12-month period, tracked over the past 90 years, equities generally provide gains of about 8.5 percent – but in the year leading up to a presidential election, gains total, on average, less than 6 percent. 1
After an election, equity returns continue to slightly underperform. It doesn’t seem to make much difference which political party takes office, but it does matter slightly whether the White House changes hands.1
When a new party comes into power, stock market gains have averaged 5 percent.1
When the same president is re-elected or if one party retains control of the White House, returns have averaged slightly higher at 6.5 percent. 1
The presidential cycle. The stock market has, for the most part, ebbed and flowed with the four-year election cycle for the past 182 years. Wars, bear markets and recessions tend to start in the first two years of a president’s term, says The Stock Trader’s Almanac3; bull markets and prosperous times mark the latter half. Since 1833, the Dow Jones industrial average has gained an average of 10.4% in the year before a presidential election, and nearly 6%, on average, in the election year. In contrast, the first and second years of a president’s term see average gains of 2.5% and 4.2%, respectively. There are recent exceptions to decent election-year returns in 2008 and 2020, when the Dow sank nearly 34%.3
A political crystal ball. Election results may not be so great at predicting stock market returns, but the reverse is not necessarily the case. The stock market has a remarkable ability to predict the outcome of the presidential race. If the stock market is up in the three months leading up to the election, the odds are in favor of the incumbent party. If losses permeate those three months, the tendency is that a new party is ushered in. 3
Economic volatility from public policies tends to be contained within specific industries rather than affecting the general economy. Usually with political issues, it tends to be more sector focused. Like the healthcare and energy sectors, specifically, can show increased volatility leading up to and after a presidential election. Healthcare and energy policies are largely driven by legislators, so a change in who controls Congress could determine whether the new president’s vision becomes a reality.1
2020 Vision. Much will be decided in the next few months. As I write, the U.S. Stock indices are approaching their historic highs made earlier this year in February. This is quite an amazing feat considering 35 days from the February peak they lost 35% in value!4 The MCF Perspective Moments (video casts) are unpacking the forthcoming decade by exploring five themes that seem to “roll through” our country every 50 years or so. Make sure you know your personal need of dollar draw-downs from your portfolio (individuals, pension plans, and endowments) over the next 5 to 7 years – it will be critical to your success in navigating your survival.
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