Why You Should Focus on Market Cycles, Not Election Cycles

Focus on Market Cycles, Not Election Cycles

Set against global economic uncertainty and dire electioneering forecasts for the worst of times here, it’s hard to stay focused on the evidence for continued slow growth (not no growth) in the U.S.

The 2020 primary-to-presidential election campaign is provoking more concern about our country’s future than any in recent memory. But amid heated rhetoric and lofty promises, we will not be deterred from our well-reasoned, evidence-backed investment discipline.

In this exclusive report, we’ll discuss why, from an investing standpoint, you can mostly ignore all the melodrama leading up to and through 2020’s election outcome.

Voters will have plenty of personal reasons for choosing one party’s candidate over the other next year. However, in terms of investment performance, history clearly shows that both Democrats and Republicans could rightly argue that their candidates spur better market gains while they’re in power (or in the years that follow) as a result of policies they’ve implemented.

What we know: Our analysis suggests that markets have tended to rise regardless of who resides in the White House. Either party can (and will) claim credit for producing these long term investment gains, even if those gains do not appear to be significantly impacted by policy. Here are a few ways the data can be spun:

  • Since 1901, the Dow Jones Industrial Average (DJIA) has risen at an 8.8% annual rate under Democratic presidents and has risen 6.2% on average under Republicans. It has risen an average of 13.0% the year before a Republican was elected and it has risen an average of just 2.1% preceding a Democrat’s victory.
  • Since 1929, the broader S&P 500 has risen an average of 10.5% annually under Democratic administrations and has gained an average of 11.9% the year after an election when a Democrat wins. Meantime, the S&P 500 has gained 3.9% a year on average when Republicans have held the White House and has fallen 0.6%, on average, in the first 12 months after a Republican president is reelected.
  • In the year after political parties in the White House change, the S&P 500 has risen an average of 6.7% versus an average gain of 6.6% when the incumbent party wins.
  • Real GDP under Democratic presidents has risen an average of 3.7% per annum since 1948 while Republican presidents have overseen a 2.8% average gain.
  • The Dow has risen in the latter half of an election year 14 of the 15 times that Republicans have won. The average six-month gain: 11.1%. The market rose in the second half of nine of the 14 years with a Democrat’s triumph. The average gain in those half-years was 3.9%.

The “facts” bolster our investment view that staying focused on economic and market cycles—not to mention investing in top-notch managers who know how to defend and profit in them—is far more important than obsessing over any single presidential candidate or election year.

We Vote for Long-Term Investment Success

While we’ve sliced and diced the election-related data many ways, even a century-plus of U.S. presidential election cycles represents a small enough sample size to fall short of statistical significance; some of the scenarios we’ve mentioned have only played out a handful of times since 1901. The numbers may make for some lively conversation around the dinner table, but we view them as anecdotal at best.

Most important: Keep in mind that the election’s biggest influence on Wall Street volatility will likely come in the months leading up to Election Day. While some level of uncertainty is endemic to investing—be it doubt about elections, earnings, foreign economic policy or any other crisis du jour—it unfailingly gives traders the jitters and newspapers their headlines.

At Adviser Investments, we are not day traders nor are our investment decisions based on headline news. In fact, while it may feel like the last few months (let alone the last few years) have been difficult times to invest, we know that it’s times like these that create long-term wealth.

Political rhetoric is poised to get even more volatile—and we think the potential for a spillover effect of increased market volatility is highly probable, but unlikely to be durable. Post-November 2020, when the election results are in, Wall Street will swiftly return its focus to interest rates and earnings, two factors that have more to do with how stocks perform in the long term than anything else.

Of course, there will be enduring attention to political issues and other concerns, but ultimately, the pace of economic expansion and earnings growth will drive the future direction of the stock markets.

Buy the Managers, Not the Pundits

Our manager-focused, diversified investment discipline is far more attuned to the market and economic facts we know rather than any political promises being made.

Adviser Investments has always taken a long-term investment view. Presidents will change and political parties will rotate through the halls of power, but we are united in our commitment to helping you preserve your savings and achieve your financial goals. Who wouldn’t vote for that?

Our Experts Analyze 2020 Election Scenarios

For more of our analysis on past election cycles and how the outcome of the 2020 presidential race could fit or break the mold, listen to the “Is Your Portfolio Election-Ready?” episode of The Adviser You Can Talk To Podcast, recorded on Oct. 14. The episode features a candid and wide-ranging discussion with Director of Research Jeff DeMaso and Vice President Steve Johnson, who delve into how investors can prepare themselves and their portfolios for the Nov. 3 election.

All investing is subject to risk of loss. Portfolio volatility related to political events and elections generally cannot be avoided nor can protection against such be guaranteed. Our report “Focus on Market Cycles, Not Election Cycles” discusses these events and the resulting historical market data.

This material is distributed for informational purposes only. The investment ideas and expressions of opinion may contain certain forward-looking statements and should not be viewed as recommendations or personal investment advice, or considered an offer to buy or sell specific securities. Data and statistics contained in this report are obtained from what we believe to be reliable sources; however, their accuracy, completeness or reliability cannot be guaranteed.

Our statements and opinions are subject to change without notice and should be considered only as part of a diversified portfolio. You may request a free copy of the firm’s Form ADV Part 2, which describes, among other items, risk factors, strategies, affiliations, services offered and fees charged.

Past performance is not an indication of future returns. Tax, legal and insurance information contained herein is general in nature, is provided for informational purposes only, and should not be construed as legal or tax advice, or as advice on whether to buy or surrender any insurance products. Personalized tax advice and tax return preparation is available through a separate, written engagement agreement with Adviser Investments Tax Solutions. We do not provide legal advice, nor sell insurance products. Always consult a licensed attorney, tax professional, or licensed insurance professional regarding your specific legal or tax situation, or insurance needs.

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