As if we needed one more thing to worry about in 2020, the U.S. Presidential and Congressional elections are bearing down on us like a freight train – albeit a rather silent freight train. Candidates have been limited in their ability to get out on the campaign trail and stump, while news sources have been divided in their coverage between the campaigns, COVID-19 and societal unrest. When candidates do have the opportunity to speak, they have very little substantive to say rather turning their focus to ideological arguments and character assassinations. Maybe this is normal, but it seems like we should have more in-depth information and discussion around the competing platforms and policy proposals by now.
Regardless of which side of the political isle you stand on, it is normal and common to be concerned about how the election results on November 3rd will influence the economy, the investment markets, and ultimately your investment portfolio. Americans feel deeply about the public policy initiatives they care most about, and these emotional ties to political issues cause us to assume that politics affect all the other things we care about – namely our investments and savings. And, while it is true that taxation, government spending, fiscal policy, etc. are influenced and initiated by politics, government does not have a seat at the table of corporate management and governance. In other words, government and public policy does not directly influence business operations and growth.
Think of it this way. When you sit down to play Monopoly - Does anybody play Monopoly anymore? I hope so! – you are given a rule book, but then you make all the decisions from thereon, depending on the role of the dice, in order to win the game. Hasbro, Inc. and Milton Bradley don’t play the game for you – based on your skill alone within the parameters of the rules you are either successful or not. Same thing in business. Government gives business the rulebook and then it is up to business to apply skill and acumen in order to win the game. If businesses are skillful, they, and ultimately you as an investor, win. If they aren’t, the opposite is true. But, throughout history American business has proven over and over that it is skilled at wading through the public policy rules in order to win the earnings and profitability game.
The markets know this, and consequently, in-depth research shows that investment markets are not influenced by election years. See this piece based on research by The Vanguard Group, Inc. Bottom line:
- The average return for a diversified portfolio (60%/40% stock/bond portfolio) during election years has been 8.9% and during non-election years has been 8.1% over the long-term.
- Average volatility during election years has been less than long-term average volatility.
- Average volatility in the 100 days leading into elections has been about the same as average volatility in the 100 days following elections.
This is counter-intuitive, and downright unbelievable, information. But, numbers do not lie.
2020 seems different. Surely, with all that is going on and with so much politically on the line in terms of societal shifts and the direction of the country this is going to be the year in which the elections will have a profound impact on the investment markets. I am not so sure. Statistically, I would not wager on it. Historically, we have been here before. And besides, you have enough to worry about. Trust in your long-term investment strategy and financial plan and save your emotional energy for the political debates. You are going to need it.
*Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss. Past performance is not a guarantee of future results. This material may contain forward looking statements and projections. There are no guarantees that these results will be achieved. It is our goal to help investors by identifying changing market conditions, however, investors should be aware that no investment advisor can accurately predict all of the changes that may occur in the economy or the stock market.