For investors, election years should be much like any other year. However, there is sometimes a temptation to try to discern how the political winds may affect investment outcomes. The temptation becomes pronounced in presidential election years, and there is a risk of becoming emotionally attached to one’s expectations.
A look at the historical record of financial market performance confirms that election years don’t impact the market in a considerable way. There have been 20 presidential elections since 1928. The stock market, as represented by the performance of the S&P 500, has gone down only four times in such years, in 1932, 1940, 2000, and 2008, and each down year was triggered by a preceding recession, not politics.
The average stock market return for election years through 2016 was 11.28%. The difference in the average return between a year when a Democrat was reelected and when a Republican replaced a Democrat in office was 1.9% – a largely inconsequential difference. (Data Source: Morningstar/Ibbotson Associates. Past performance does not guarantee future results.)
Financial market history also reveals that market performance is best in the third year of a presidential term, and weakest in the first year. One hypothesis is that the most unpopular measures are taken soon after a president is elected, while in the third year the economy is stimulated as incumbents are looking for reelection. This explanation is not consistent with recent history, however.
Portfolio performance is driven by the financial markets, and financial market performance is dependent upon the economy. Politics will influence economic growth, but usually indirectly, and often in ways that are unexpected and unanticipated. Looking ahead to the rest of 2024, rather than focusing on polls, investors should be investigating:
- Is inflation down to acceptable levels? Will the Fed be able to lower interest rates later this year? How far could rates fall?
- What balance should I strike between stocks and bonds in my portfolio? What is the best balance of risk and return for my time horizon? Which bonds are best?
- Which stocks are poised for substantial growth as the economy evolves? Which are at risk as new competitors emerge with new technologies? Are there regulatory risks to any companies?
- How likely is a recession this year? What defensive measures are appropriate in an investment portfolio?
An Arvest Wealth Management client advisor is an excellent resource for exploring and answering these questions, and can help design a unique investment strategy suitable for each client.
This content has been prepared by The Merrill Anderson Company and is intended as a general guideline.
© 2024 M.A. Co. All rights reserved.
Arvest and its associates do not provide tax or legal advice. The information presented here is not intended as, and should not be considered, tax or legal advice. Consult your tax and legal advisors accordingly.