Elections and Market Returns
This year is turning out to be very different than investors had anticipated. At the start of 2020 there was not a single market strategist who said a global virus would act as a headwind to the economy and the markets, but here we are today dealing with what is certainly a black swan event. In normal presidential election years, the media covers the latest election news daily, but this year has been different. With so much going on, the election has taken a backseat.
However, now that we are getting closer to November, we will begin to see the two candidates hold campaign rallies and eventually square off in debates. It is natural for investors to ask if they should shift their portfolio more conservatively, or if cash is held on the sidelines, wait until after the election to invest.
To answer that question, we looked at historical S&P 500 returns during election and non-election years. What can be seen on the chart below, is that on average the S&P 500 has moved up in both election years and non-election years. Going back to 1932, what has been observed is that the first part of an election year (mid-term or presidential) is more volatile and markets decrease from April through June. However, once the two parties have selected their primary candidate, the market continues its normal course.
It is certainly true that we have unprecedented challenges in 2020, but past election years have also seen their share of difficult times. That includes many crises, including 1944 during World War II, historical high inflation in 1980, the 2004 election during the Iraq War, and 2008 when the financial system almost collapsed. Although we cannot tell the future, our country has a good track record of continuing to push forward.
Markets can certainly decline from these levels, but over the long run, markets are expected to move up as our economy recovers and continues expanding. Therefore, we are bullish long term, but understand that markets will provide opportunities as it hits friction points to find equilibrium. We were able to take advantage of the March decrease and we are prepared to make short term shifts if we see more opportunity. As a result, we advise not to make portfolio shifts solely on the upcoming election, and if cash is on the sideline, a dynamic dollar cost average approach is the best way to invest money that is in cash.