It’s almost Election Day in the US once again. While the outcome of the election is uncertain, one thing we can count on is that plenty of opinions and prognostications will be floated in the days to come. In financial circles, this will almost assuredly include any potential for perceived impact on markets. But should long-term investors focus on elections?
We would caution our clients against making short-term changes to a long-term plan to try to profit or avoid losses from changes in the political winds.
The 2016 presidential election serves as a recent example of this. There were a variety of opinions about how the election would impact markets, but many articles at the time speculated that stocks would fall if Trump were elected. The day following President Trump’s win, however, the S&P 500 Index closed 1.1% higher. So even if an investor would have correctly predicted the election outcome (which was not apparent in pre-election polling), there is no guarantee that they would have predicted the correct directional move, especially given the narrative at the time.
While it can be easy to get distracted by month-to-month or even one-year returns, what really matters for long-term investors is how their wealth grows over longer periods of time. The graph above shows the hypothetical growth of wealth for an investor who put $1 in the S&P 500 Index in January 1926. The chart lays out which party was in presidential office over time. And as you can see, both parties have periods of significant growth and significant declines during their administration. However, there does not appear to be a pattern of stronger returns when any specific party is in the executive office. Markets have historically continued to provide returns over the long run irrespective of (and perhaps for those who are tired of hearing political ads, even in spite of) which party is in power at any given time.
Equity markets can help investors grow their assets, and we believe investing is a long-term endeavor. Trying to make investment decisions based on the outcome of elections is unlikely to result in reliable excess returns for investors. At best, any positive outcome based on such a strategy will likely be the result of random luck. At worst, it can lead to costly mistakes. Accordingly, there is a strong case for investors to rely on patience and portfolio structure, rather than trying to outguess the market, to pursue investment returns.
As always, our advice to our clients is “stay the course” and stick with your investment plan we have created together.