Forbes - September 21, 2020
We are just two months out from the election, and it’s making investors nervous, as it does every four years. Investors should realize that regardless of who wins the White House, election results make virtually no difference in investment returns. Although some experts are predicting this campaign season to be the "wildest" ever , clients should continue to focus on their existing investment strategies. Long-term investing should be precisely that: focused on the long term and on the investment itself. There is very little evidence that election outcomes affect the overall performance of your investment portfolio. Historical Election Year Returns
According to The Balance , election-year returns are generally positive, but in fact, the third year of a presidential term is usually the most profitable . According to Forbes, it is more common that volatility increases during election years. Volatile markets can provide opportunities for timing entry or exit of a particular position, but generally, an overall market timing strategy is not often successful . Thus, pre-election volatility, while it can be quite intimidating, is best responded to by simply riding it out. Changes should be made only with your overall investment strategy, not in reaction to short-term primary season volatility.
Winning Isn't Everything
Though you may be passionate about who wins a particular election, over the long term, which party is in power has had little to no impact on investment returns. For example, there have been seven Democratic and seven Republican administrations since Franklin Roosevelt. Yet, according to Capital Group ACGL , a $1,000 investment made under FDR would likely be worth $14 million today . None of the intervening administrations would have had any significant impact on that value.
In general, the Dow will be up 9% under a Democrat and only 6% under a Republican , but normal market variations outweigh this small difference. Further, according to MarketWatch, most of the slight differential arises out of the timing of two catastrophic market crashes under Republican presidents and the subsequent recoveries under Democrats. While the election does little to predict the market, the market often predicts the winner: if the markets are up during the three months before the election, the incumbent almost invariably wins ( 87% of the time ).
One expert suggests that, rather than the presidential victor, the best indicator of the financial future after an election is the minority leaders of key House and Senate committees, who can control what gets through the budget reconciliation process. None of that past performance, of course, predicts future results. The best strategy for the investor, then, is almost certain to continue to focus on their pre-existing investment strategy rather than on the potential occupant of the White House.
Ignore Pre-Election Volatility
Markets and investors despise uncertainty, and particularly the uncertainty of the primary season and a hotly contested election. Generally, investors move during the pre-election period out of riskier investments and into low-risk money market funds, with a tripling of investment in these funds common during election years. But according to Tom Hainlin, Market Strategist for US Bank, this volatility is generally short-lived and can essentially be ignored for investment purposes. Hainlin also notes, however, that it is sometimes possible to take advantage of short-term pre-election volatility to take a previously selected position at a better price.
Barring the 2008 financial crash, markets have consistently traded positively in the six months before a presidential election. For that reason, it seems to make the most sense to simply ride out the storms of pre-election volatility while allowing for the occasional well-timed specific transaction that is well priced due to short-term volatility.
Focus On New Or Continuing Policies
Instead of looking at which party or which candidate will win, focus on how the policies of the new or continuing administration can affect your planned investments. A new administration can make key changes in areas such as interest rates, the regulatory burden, tariffs (which could change dramatically as a result of the current contest) and trade. Any or all of these potential changes can have a significant impact on the business climate and the related profitability of your investments. In the long term, focusing on the potential policy changes can be far more impactful than focusing on the potential winner.
Health Care Stocks May Be The Exception
Although this election probably will not have a major impact on the markets, the continuing COVID-19 crisis will affect health care stocks, so it is likely best to avoid that sector this year. Some experts say that, for the first time, the pandemic aligns the interests of all health market participants . Others, such as the Wall Street Journal, think that the pandemic alone cannot predict the performance of the health care sector. In either case, the result, whatever it may be, will come more from the fall out of the pandemic than from who wins the election. In the end, purely concerning investment returns, it does not matter what happens on November 3 rd ; what matters is the next five years of your life. Any gains or losses under a particular party even out over time despite the market volatility that often occurs in election years. The best market strategy for an election year is to remain committed to your existing investment plan and drown out the election noise.
Brian Menickella is a co-founder and managing partner of The Beacon Group of Companies, a broad-based financial services firm based in King of Prussia, PA .
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