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Investing During Election Years

By August 7, 2020 No Comments

The 2020 Election and Market Implications

2020 has been a notable year for stocks and the global economy. On February 19th, the S&P 500 reached an all-time high of 3,386 and was immediately followed by one of the quickest declines in history — falling 34% from its peak by March 23rd. The bear market resulting from the coronavirus pandemic, and the fact that 2020 is an election year, has caused many investors to question whether they should take a more conservative approach with their investment allocations.

What should you as an investor do to protect your assets?  Should you sell your stocks now and wait to see how the election turns out? Do you stay the course and hope your desired party is elected?  These are questions that investors are wrestling with as November approaches, but the truth is that none of us know what the result of the election will be this fall, or what its immediate impact will be on the market.

Let us look back at what has happened with the market since January 1926 under the various presidential parties.  The top line of the chart represents the growth of $1 invested in the S&P 500 from January 1926 through December 2019.

Markets Have Rewarded Long-Term Investors under a Variety of Presidents

Growth of a Dollar Invested in the S&P 500:  January 1926-December 2019

As evidenced in the chart above, the political affiliation of the party in office does not necessarily influence the long-term result of stock returns.  And while the market does experience periods of downside volatility, investors should not base their investment strategy on the unknown, such as the perceived outcome of an election.

Take, for example, the following news headline from September 2016: “Mark Cuban Predicts a Stock Market Crash if Trump Wins the White House.” Mark Cuban, a successful entrepreneur and billionaire, predicted the stock market would crash if Trump were to be elected in 2016.  Unfortunately, investors who heeded Mr. Cuban’s advice quite possibly missed out on all, or some portion, of the 47% increase in the S&P 500 since then.

Historically, there is no evidence that supports a correlation between the party holding the office of president and stock market returns.  While selling equities in anticipation of the unknown may feel good for a while, the decision to sell will eventually turn to regret when the market resumes its upward trend.

 In US dollars.
Past performance is no guarantee of future results. Declines are defined as months ending with the market below the previous market high by at least 10%. Annualized compound returns are computed for the relevant time periods after each decline observed and averaged across all declines for the cutoff. There were 1,115 observation months in the sample. January 1990-Present: S&P 500 Total Returns Index. S&P data © 2019 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. January 1926-December 1989; S&P 500 Total Return Index, Stocks, Bonds, Bills and Inflation Yearbook™, Ibbotson Associates, Chicago. For illustrative purposes only. Index is not available for direct investment; therefore, its performance does not reflect the expenses associated with the management of an actual portfolio. There is always a risk that an investor may lose money.

 

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