Elections are the cornerstone of our democracy. They are supposed to bring out our best, yet recent election years seem to divide rather than unite us. Another close presidential election and a polarized electorate of voters has investors on both sides of the isle deeply concerned about what the outcome of this election means for our country and economy.
This letter is not going to address the social or geopolitical implications of this election, we have plenty of media to do that. Instead, we would like to review market returns during and after previous elections to see what lessons can be applied now in managing your investment portfolio.
Since 1928 there have been 21 election years. In 18 of those years, or 86% of the time, the S&P 500 has provided positive returns.
The 3 negative returns occurred in:
1932 – The great depression
2000 – Tech bubble
2008 – Financial Crisis
At first glance the percentage of positive years with positive returns seems like market manipulation, however, the markets are up in most years. Including both election and non-election years over the same period, the market was up 73% of the time.
History also shows that stock market returns have little to do with which party holds the White House. The chart to the right shows that long-term growth of wealth depends more on remaining invested for the long term rather than on the policies of either party.
In addition to avoiding market timing, we also encourage people to resist the temptation to dramatically reposition their portfolio, based on the outcome, or projected outcome, of an election.
Based on their respective political agendas, most people would have expected renewable energy providers to underperform under the Trump administration and outperform under the Biden administration. The charts below show that the actual outcome was opposite of what most people would have predicted.
The lesson to be learned here is that presidential elections have less influence on the markets than we expect and should not override our long-term investment strategy.
As David Booth, founder and chairman of Dimensional Fund Advisors, stated “Vote with your ballot, not your life savings”.
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