Unless you have been living under a rock, you are well aware of not only all the chaos within the Democratic party causing President Biden to step away from the presidential race, but also the attempted assassination of former President Trump. So what does all this mean for the stock market and maybe more importantly, your own portfolio?
Depending on the person, presidential election years can be entertaining. Personally, I hate them and am thankful they only occur every four years. However, as one of the owners of LCM Capital Management, a federally registered investment advisory firm, it’s our job to pay attention to what is happening in the world and how it might be affecting our clients’ portfolios. If you have read any of our previous articles, you know my firm does not have a great deal of respect for market strategists, economists or analysts since they are only guessing at what will happen in the future; more importantly, most of their guesses are usually wrong.
The stock market's relationship with political events, particularly U.S. presidential elections and the party affiliation of the president, has long intrigued investors and analysts. During election years, there always seems to be heightened scrutiny on market’s performance as investors and analysts try to predict (that is, guess) how political changes might impact the economy and as a result the stock market.
However, despite the intense focus, historical data suggest that the stock market performance during election years does not significantly affect long-term investment outcomes. The reason: the stock market is a barometer of economic health and investor sentiment. The data suggests that while political factors can influence short-term market behavior, long-term performance is driven by broader economic fundamentals.
Case in point, historical data shows varied performance:
- 1980 Presidential Election: The S&P 500 gained approximately 25%, despite economic challenges and the Iran hostage crisis. Ronald Reagan - Republican won
- 2000 Presidential Election: The market ended the year with a modest loss due to the dot-com bubble burst. The “hanging chad” election. G.W. Bush – Republican won
- 2008 Presidential Election: The market plummeted by over 30%, primarily due to the global financial crisis. Barack Obama - Democrat won
- 2016 Presidential Election: The S&P 500 saw a roughly 10% increase despite significant uncertainty. Donald Trump - Republican won
These examples illustrate that market performance during election years is influenced by multiple factors, including economic conditions, corporate earnings, global events, and monetary policy. These results tend to move due to factors other than the immediate political election landscape. One might also assume that Republicans are better for the markets. However, according to data from CFRA Research, from 1945 through 2019, the S&P 500's average annual return was approximately 10.8% under Democratic presidents and about 5.6% under Republican presidents. Now what do you think?
Give the following some thought:
- Clinton Administration (1993-2001): Marked by economic expansion and a booming stock market, the S&P 500 delivered an average annual return of just over 15%. Key factors included the rise of the internet (thanks to Al Gore creating it) and technology sectors, balanced budgets, and trade policies.
- Bush Administration (2001-2009): Experienced significant market fluctuations, with the early 2000s dot-com bubble burst and 9/11 attacks leading to downturns. The 2008 financial crisis caused a severe market crash, resulting in an average annual return of just over -5%.
- Obama Administration (2009-2017): Implemented measures to stabilize the economy during the Great Recession, resulting in a market rebound and an average annual return of 13%.
- Trump Administration (2017-2021): Focused on tax cuts and deregulation, leading to significant market gains. Despite the sharp decline in 2020 due to the pandemic, the market quickly recovered, with an average annual return of just over 13.5%.
While historical data suggests that the stock market has performed better on average under Democratic presidents, attributing market performance solely to the president's party affiliation oversimplifies a complex relationship. Factors such as GDP growth, inflation rates, employment levels, and corporate profits have a more direct and sustained impact on the market compared to political events. While elections can create short-term volatility due to uncertainty, it is the underlying economic conditions ultimately drive market trends.
So what should investors do? For starters, they should vote on Tuesday, November 5th. Remember, you can’t complain if you don’t vote. Second, don’t make investment decisions based on what you hear on TV or see in the polls. Behavioral finance studies have shown that investors can be easily influenced by emotions such as fear and greed, leading to overreactions to political news. Maintain a diversified portfolio. This will help weather any short-term market volatility caused by a single event. Trust us and our 36 years of experience. Focus on a long-term investment strategy rather than react to political events. Your portfolio will thank you.
About John Nowicki
John Nowicki serves as co-founder, President and CCO with over 36 years of industry experience. He spends his days helping executives, physicians, and business owners prepare for a retirement that is comfortable by reducing costs, taxes and balancing risk.
John is passionate about providing transparent financial services. He is committed to empowering his clients with financial knowledge and understanding so they can make the right decisions for their life and family.
Connect with John on LinkedIn here, or contact us here to arrange for an appointment.