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Election Uncertainty and Market Resilience: What Investors N…

Should You Adjust Your Portfolio Before the Election?

As advisors, we often hear from clients in election years, wondering what the impact of the election will be on their portfolio, and whether this is a good time to “take a break” from the market until the dust settles after the election, or even later, if their preferred candidate doesn’t win.

This election cycle is no exception, and in fact it appears to be causing widespread anxiety around the country. More than 60% of U.S. respondents to a recent Forbes Health survey said their mental health has either been slightly, moderately, or significantly negatively impacted by the upcoming election.

Naturally, when we are anxious, it feels important to “do something” about our anxiety. So, is this a good time to “do something” about our investment portfolios?

Learning from Historical Election-Year Markets

In early September, Abacus hosted an online discussion between our Chief Investment Officers and Apollo Lupesco. Apollo works for Dimensional Fund Advisors and is a sought-after speaker on financial topics, as he has a gift for making complex topics digestible to ordinary folks. Six weeks later, some of their discussion points bear repeating.

1. Political Predictions vs. Market Reality: Lessons from Recent Presidents

Trying to make investing decisions based on what might happen if a certain political candidate wins can be difficult at best, and a fool’s errand at worst. Apollo cited two examples during the webinar.

After Trump won in 2016, many people felt his tariff policies would be good for companies like U.S. Steel, and indeed that stock shot up until March 2018, when the tariffs were officially announced. After that, however, through the end of Trump’s term, U.S. Steel lost the majority of its value.

Apollo then cited another example of “political wisdom” that predicted fossil fuel companies like Exxon would suffer during the “greener” Biden administration. Once again, the stock dropped sharply in the beginning of the Biden years, reflecting that concern, but is now more than three times higher than it was in March 2020. Indeed, during the Biden administration, U.S. oil production — and oil and gas company profits — have broken records.

2. Understanding Market Odds: Short-term Risk vs. Long-term Growth

Planning your investment position based on short term economic and political trends means taking a big gamble that defies the historical performance of the market. It might be tempting to take some investments “off the table” at a time when things feel risky, but the hard part is to figure out when to re-invest.

During the webinar, Election Year Investing with guest, Apollo Lupesco, Apollo noted that on a day-to-day basis, the market is 50/50 on whether it will go up or down (i.e. 53% of the time the market goes up, and 47% of the time the market declines) (23:34). On a quarterly or annual basis, however, the odds change significantly. Over 71% of the time, quarterly performance is positive, and 29% of the time performance is negative (24:12). (Annual performance is similar – 78% positive, 22% negative. (25:00)). The longer you stay out of the market, the worse your odds become. Looking at election years in particular, Apollo noted that out of 24 presidential election years since 1928, only four have seen a market drop (28:45).

3. Historical Perspective: Presidential Terms and Market Performance

We’ve heard people ask, “Is this time different?” Some of our clients have told us that this year, they feel like the election could result in almost apocalyptic outcomes depending on who wins the presidency. While it certainly may feel that way, when it comes to investing, historical data can provide some perspective.

Both Reagan and Obama were polarizing political figures who have been idolized by their own party while being scapegoats for the other side. Reagan emphasized business friendly policies and deregulation, while Obama’s signature accomplishment was increasing access to health care. And yet, the market performance during both of their respective eight year terms was almost identical, averaging 16% per year over those eight years as shown in the chart below.

Exhibit 1: Each president’s annualized return begins with the first full month of returns of the presidency. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance does not guarantee future results. Index Returns are not representative of actual portfolios and do not reflect costs and fees associated with an actual investment. Actual returns may be lower. Source: Dimensional. S&P data © 2019 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved.

Indeed, as this graph shows, nearly all Democratic and Republican presidents in the last 50 years have seen positive market performance during their terms. Remember that many factors influence markets – interest rates, employment rates and international relations tend to have far more of an impact on market performance than what political party happens to be in office at the time.

Take the Long View: Your Investment Strategy Beyond Election Day

History shows us that while elections may create some short-term market volatility, they rarely determine long-term investment success. The key to navigating election-year uncertainty around your investments isn’t about timing the market based on political outcomes – it’s about maintaining a well-diversified portfolio aligned with your long-term financial goals.

We also understand that election seasons aren’t just about numbers and markets – they’re about very real concerns for our families, our communities, and our future. And we know that for many people, this time does feel different. So while we counsel patience over reaction when it comes to investments, we definitely encourage you to consider other “do something” options, like writing postcards and making phone calls for your favorite candidates, and paying attention to things in your community where your voice can have an impact.

Here are three key takeaways to remember:

Market performance has historically been positive across both Democratic and Republican administrations, suggesting that a disciplined investment approach transcends political cycles.
Attempting to time the market based on election outcomes can lead to missed opportunities, as demonstrated by examples like U.S. Steel and Exxon.
The longer you stay invested, the better your odds become – regardless of who occupies the White House.

Rather than making reactive investment decisions based on election anxiety, this may be an ideal time to review your financial plan with a financial advisor. An experienced advisor can help ensure your portfolio remains aligned with your goals while maintaining the appropriate level of risk for your unique situation.

Don’t let election uncertainty derail your long-term financial success. Our team is here to help you navigate these challenging times with confidence. Schedule a call today to learn how we can help you stay focused on your long-term financial objectives, regardless of the election outcome.

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