It’s an election year and many investors are wondering (or worried!) about how the election will impact their portfolio. Common questions are:
- What has happened historically to the markets during an election year?
- How have the economy and the markets performed under Republican versus Democrat governments?
- What topics should investors be thinking about and discussing with their financial advisor?
Beacon Wealth Consultants’ Cassie Laymon and Hillary Sunderland discuss how the stock market and economy have performed in past election years and address some common questions we hear from clients such as the ones mentioned above.
Watch the video for some straight-forward answers and encouragement based on historical data!
(Full transcript below)
Cassie Laymon:
Hillary, this is an election year and it is on everyone’s minds. We’re thinking about this upcoming big event in November, maybe a little anxious and worried. Tell me how are you feeling about the markets with this being an election year?
Hillary Sunderland:
Yeah, great question, Cassie. So over the last five to six months, the stock market has rallied, which has been really encouraging for investors after a few years of sideways markets. However, I do think the market is due to tame down a bit, and that’s because it’s a presidential election year. So presidential elections add an extra amount of uncertainty and the markets hate uncertainty.
So historically, leading up to an election, what we typically see is elevated volatility and more muted returns. To put some numbers behind that, since 1932, on average, the S&P 500 has returned 6.2% during an election year versus 9.6% during non-election year. So about a three and a half percent difference in returns. But what’s encouraging to note is that even though returns tend to be more muted in an election year, after election day, that source of uncertainty has cleared and regardless of the result of the election markets move forward and start focusing on fundamentals once again. So typically that market sell off, or at least elevated volatility leading up to an election, is usually very short-lived.
Cassie:
Okay. Well, great. So tell me about this: If someone’s meeting with their financial advisor, what are the topics that they should be thinking about and discussing with their financial advisor? Because it’s an election year?
Hillary:
Well, there’s a lot riding on this election in terms of potential changes to the tax law. The new president is going to face the scheduled expiration of the 2017 Tax Cuts and Jobs act soon after the inauguration. That act lowered individual tax rates by restructuring tax brackets, almost doubled the standard deduction, changed capital gains tax rates to benefit higher income tax payers and effectively doubled the lifetime gift in estate tax exemptions. That is a lot of potential tax changes coming down the pike because those are set to expire on December 31st, 2025. One of the things our wealth advisors are really watching closely is how that’s going to play out. What’s going to actually happen to different tax levels is still highly uncertain, but our advisors are watching this closely and we’ll talk to each one of our clients about this and how it could impact their financial plans personally.
Cassie:
Great, thank you. That’s good. That’s very helpful I think for people to know what the topics are that they need to be covering. So in an election year, I think most people are thinking, what’s going to happen if my party wins? What’s going to happen if the other party wins? And then there’s also this scenario of what if one party wins the presidency and one party wins the Congress? So can you talk us through that a little bit?
Hillary:
Sure. I think the best way to address this is to look at a few charts. So the top chart here highlights real economic growth for each calendar year since World War II, and the color of the bars represent which political party was in control. So post World War II, economic growth has been on average 2.8% when Republicans had control and 4% when Democrats had control.
And then looking at the bottom chart, you can see the returns of the S&P 500 index, which is a measure of the performance of the largest publicly traded companies in the United States. Post World War II, on average, the S&P 500 has returned 12.9% when Republicans had control and 9.3% under Democrats.
Now, from this, it would be easy to conclude that the economy performs better under Democrats and the market performs better under Republicans. But I want to point out here the sample size is are relatively small, and Republicans have been in control only 10% of the time since World War II and Democrats only 29% of the time. By far, the most common configuration of government is divided, which has produced 2.7% real GDP growth and 8.3% annualized returns on the S&P 500.
So I know it may be difficult to believe this, but ultimately, as you can see from these charts, both the economy and the stock market tend to fare well under most government configurations. Over time, we find that the markets have been resilient, irrespective of the political backdrop. The most important thing that drives stock prices over time is earnings. And who’s been in charge in Washington has historically had very little impact on this, especially when you’re investing in a globally diversified portfolio.
Cassie:
Well, I love that you are sharing some facts with us here because I feel like elections and politics are so emotional and we have in our mind what is going to be the worst case scenario, what is going to be the best scenario. So you have just broken it down and said, here are the facts and this is how it works. And I think that is what really helps us to take some of the emotion out of this. So I appreciate that on a personal note, I appreciate that. So what kind of changes are you going to make to the portfolios because it’s an election year?
Hillary:
Well, based on what I just went over on those charts, we don’t let how we feel about politics overrule how we think about investing. I’m a strong believer that political opinions are best expressed at the polls not in your portfolio. And the reason for this is that the outcomes of elections, while they’re of consequence, the impacts to the markets are not direct. They’re not always immediate, and they’re not always apparent. Just because one political party wins an election and makes a campaign promise running up to that election, it doesn’t mean that their campaign promise will actually come to fruition. And I think we can really see this now in Congress because even within one political party, due to growing political polarization, garnering enough consensus to pass legislation even within one’s own political party has become increasingly difficult. Therefore, it’s nearly impossible to design an effective and repeatable investment strategy around an election cycle based on an anticipated political outcome. We believe that we can serve our clients best by managing our portfolios for a range of outcomes, and that’s what we’re going to continue to do within this election year.
Cassie:
Terrific. Well thanks Hillary for that. I’m sure we’re going to come back to this topic at least one more time, if not more throughout the year. But I would also just encourage people if you have questions to send them to us and we’d be glad to cover them in our video chats here. Thank you so much, Hillary. Have a great day.
Hillary:
Thanks, Cassie.