- Milad Taghehchian, CPA, CFP(R)
Elections and Markets
Election day is upon us. As we all know, this year has been filled with new experiences and this election may be similar. With many folks voting via mail-in ballots, we may not have the results of the elections on election night. While this is unusual it is certainly not unprecedented. So how do elections and presidential parties affect our investments?
Investments performance around elections.
There are thousands of variables that effect investment performance and volatility. Some variables affect market fluctuations more than others. The big ones are economic growth, innovation and technological improvements, productivity, as well as interest rates or more accurately cost of capital. Political policies and fiscal strategy can also affect investment performance. Uncertainty around any of these issues leads to volatility in markets. Volatility doesn't necessarily indicate up or down markets, but simply a lot of movement because of the unknowns.
As we can see from the display below, historically this volatility has not resulted in any significant change to normal market performance in the 100 days before or after an election. The second chart shows historical performance of a balanced portfolio in election years vs. non-election years. Again, while there may be more volatility, there is not any total return difference that is significant.
We can also see that there is no consistent correlation with any month in an election year. The distribution of monthly returns in election years appear to be completely random as would be expected.
Does a Republican or Democratic administration lead to better returns?
While punditry may express a strong preference toward one party or another, the data shows us a different story. The charts below shows annual returns reflecting each presidential administration. The data clearly shows that overall average annual returns are very similar regardless of political affiliation.
What should investors do?
The conclusion here is that while politics has many impacts on society and potential impacts on particular industries, the markets as a whole are less affected. Investors are better served by focusing on the variables that most likely affect investment performance. Rather than reacting to headlines, investors should stay focused on the enduring principles of investments as listed below.
Build and maintain a diversified portfolio that is diversified in all of these ways.
Size of Companies
Rebalance when statistically significant
Take a long term view. We know the short term is always volatile.
As always, contact your investment advisors for more detailed information that applies to your particular portfolio and financial situation. And VOTE!