Episode #40: Do Elections Impact the Stock Market?

Elections impact on stock market

October 13th, 2020

It seems like it’s been an insanely nasty election season, doesn’t it? Many people are left wondering how it’s impacting the stock market—and your investments. An election season riding the wake of the Coronavirus pandemic leaves everyone with a lot of uncertainty. So what should you do with your current investments? 

In this episode of Making Finance Fun, I talk about the historical impact of elections on the stock markets. I also share a few things I’d recommend NOT doing with your investments, along with a few things you might consider. Check it out!

Outline of This Episode

  • [3:35] The average election-year stock market return 
  • [5:29] The misconception that stocks get volatile
  • [9:00] How stocks perform during election years
  • [11:27] The market performs well under both parties
  • [14:49] The economy is never radically changed
  • [17:47] The historical narrative is not how you remember it
  • [21:00] Why it’s okay if you don’t like the president
  • [23:25] This isn’t the nastiest election cycle that we’ve had
  • [26:20] Market predictions tend to be wrong
  • [28:32] What should you do with your money?

The misconception: stock market volatility

Vanguard wrote a piece called “Elections matter, but not so much to clients’ investments.” In the article, they share some research starting from the 1860s. They found that the average return during election years has been 8.9% (of a 60/40 stock/bond portfolio). The average return during non-election years? 8.1%. Stocks—historically—do better during election years

According to the same article, from 1/1/1964 to 12/31/2019 the S&P 500’s annualized volatility was 13.8% the 100 days before and after the presidential election. That’s lower than normal volatility levels. Plus, volatility doesn’t always have negative connotations. It can simply mean a move up or a move down. 

Since 1980—in my lifetime—we’ve had 10 election years. 8 out of the 10 years, The S&P 500 went up. On average, it’s averaged a 7.89% return during elections. The 2008 global crisis likely even skews the average a little.

10 Truths No Matter Who Wins

In the article, “10 Truths No Matter Who Wins” Brian Levitt shares 10 points related to elections. I think a few of them were on-point and needed to be shared with you:

  1. Markets perform well under both parties. Since 1860, a 60/40 portfolio has averaged 8.2% under Republican presidents and 8.4% under Democrat presidents. 
  2. No matter who wins the economy isn’t radically changed. While presidents can have signature pieces of legislation pass, they haven’t significantly impacted the stock market. 
  3. The historical narrative is never how you remember it. I’ve heard “this is the most important election of our lifetime” every election. It’s ridiculous. Listen to hear why. 
  4. Markets don’t care if you don’t like the president. Some of the best returns came with low presidential approval ratings (36-50%). Stocks still averaged over 15% during that time. 
  5. This isn’t the nastiest election cycle that we’ve had. I share an insane story you’ve probably never heard about political candidates—listen to hear what it is. 
  6. Market predictions are usually wrong. No one knows when the market will tank. So don’t pay attention to predictions and take them with a grain of salt. 

I discuss each one of these points in-depth and share some supporting information that you’ll definitely find interesting. Listen to learn more!

What should you do with your money?

Election years are tricky for investors, especially as you edge closer to election day. Politics are emotional and it’s hard not to make some emotional decisions with your money. That being said, there are some things you shouldn’t do:

  • Don’t try to time the market. You might get lucky but then you have to decide when to buy back in—and most people don’t do it at the right time.
  • Don’t panic sell. For example, the Dow Jones dropped 400 points when Trump said he wouldn’t approve a stimulus deal before the election. The next day, the Dow Jones went up 420 points. Had you sold, you’d never think the market would snap back that quickly. 
  • Don’t panic-purchase. Some folks panic buy because they’re worried they’ll miss out on an upswing. 

So what are some things you could do? If you have stocks or ETFs that you’ve made gains on, sell some of it so you can sleep at night. You don’t keep your investments forever, right? Secondly, if you have some extra cash, you can hang on to it. You could pay off some debt, put a down payment on a house, buy a car, fix your roof, and so forth. If you want to buy some investments, use the extra money to purchase some while they’re low. 

This episode is an interesting discussion centered around the upcoming election and how I (and other researchers) think it will impact the stock market. Some of the research might not be what you expect! Give it a listen. 

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