What can the last 23 elections tell us about this one?

Among the many uncertainties of 2020 is the upcoming US presidential election.

When it comes to uncertainty, our minds often organize potential outcomes by looking for patterns. We tend to look for patterns in past experiences – in relationships, sports, the weather – to help make sense of an unknown future. We do this without even realizing it. It’s a natural shortcut. It’s a tool to help us make sense of the world and make an unknown future less stressful.

As we approach a particularly contentious election, perhaps there is a pattern that we can rely on in past elections.

If we look back to 1926, we find 23 presidential elections leading up to this year (2020).

US Presidential Election Years

1926-2020

Of these 23 elections, it may come as a surprise that the vast majority of election years were positive return years. In fact, of the last 23 presidential elections, the year ended with a gain in 19 election years. Just 4 election years ended the year with loss.

US Presidential Election Years & Market Returns

S&P 500 Index: 1926-2019

Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. Index returns are not representative of actual portfolios and do not reflect costs and fees associated with an actual investment. Actual returns may be lower. Source: S&P data © 2020 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved.

Here is a closer look at the 4 losing years:

1932: -8.2%

Roosevelt vs. Hoover

1940: -9.8%

Roosevelt vs. Willkie

2000: -9.1%

Bush vs. Gore

2008: -37.0%

Obama vs. McCain

Is a republican or democrat better for future market returns?

S&P 500 INDEX: 1969-2020

Annualized market returns during presidential terms. Each president’s annualized return begins with the first full month of returns of presidency. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. Index returns are not representative of actual portfolios and do not reflect costs and fees associated with an actual investment. Actual returns may be lower. Source: S&P data © 2020 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved.

Is there a predictable pattern? Not one that we can see.

Each year there seems to be something more going on in the world, both good and bad. The year is noisy with information. There is a lot going on, including an election.

While it is natural for anxiety to increase in an election year, unfortunately, there is no clear evidence that investors should be more worried in an election year. In fact, election years look similar to non-election years.

Certainly, the president will have an impact, but it appears that presidents should receive neither credit nor blame. There are many things outside of their control.

Not a pattern, but a constant

While there may not be a predictable pattern, there is at least one constant that we believe can help us make sense of these data:

Irrespective of who is in control of the levers of government, market returns represent the ebb and flow of business. While the president and congress will have some impact on business operations, businesses usually figure out a way to survive.

During World War II, when demand dried up for the automobiles made by General Motors, they started making aircraft and tank engines. During the coronavirus pandemic, when the customers stopped visiting our local Reno distilleries, they started making hand sanitizer.

Very few destructive events, and even fewer political entities, can force a company to lose money for any extended period.

Accordingly, there is a strong case for investors to rely on patience and portfolio structure, rather than seeking a predictable pattern to navigate the future.

Markets Have Rewarded Long-Term Investors under a Variety of Presidents

While we didn't find a predictable pattern, we did find that markets have rewarded long-term investors under a variety of presidents.

In early August we published an article featuring the charts below. For more information, read the full article here.

The chart below shows lays out party control of the office of President over time. It shows the hypothetical growth of wealth for an investor who put $1 in the S&P 500 Index in January 1926.

Both parties have periods of significant growth and significant declines during their time in office.

However, there does not appear to be a pattern of stronger returns when any specific party is in control.

GROWTH OF A DOLLAR INVESTED IN THE S&P 500: JANUARY 1926–DECEMBER 2019

Past performance is not a guarantee of future results. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio. Source: S&P data © 2020 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved.

Results similarly appeared random when looking at the party in control of congress.

The chart below shows lays out the party in control of congress.

Despite many different opinions and actions regarding tax policy, spending policy, and social policy, markets have historically provided 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, even when there is mixed control of Congress.

Markets Have Rewarded Long-Term Investors under a Variety of Congresses

HYPOTHETICAL GROWTH OF $1 INVESTED IN THE S&P 500 INDEX AND PARTY CONTROL OF CONGRESS

What History Tells Us About US Presidential Elections and the Market

It’s natural for investors to look for a connection between who wins the White House and which way stocks will go. But as nearly a century of returns shows, stocks have trended upward across administrations from both parties.

Shareholders are investing in companies, not a political party. And companies focus on serving their customers and growing their businesses, regardless of who is in the White House.

US presidents may have an impact on market returns, but so do hundreds, if not thousands, of other factors—the actions of foreign leaders, a global pandemic, interest rate changes, rising and falling oil prices, and technological advances, just to name a few.

Stocks have rewarded disciplined investors for decades, through Democratic and Republican presidencies.

Logic and emotion

We don't intent to dismiss the anxiety or uncertainty related to the upcoming elections, particularly this one. These feelings are natural. We feel them too.

No amount of historical record will save us from the uncertainty of the next few months.

Yet, the world has always been an uncertain place. It will continue to be uncertain after this election. There is always something new and legitimate that concerns us next.

Do we ever actually see certainty? Probably not. We move from more uncertainty to less uncertainty, back to more uncertainty again.

Uncertainty is always with us.

We can help you decrease uncertainty

We can help you navigate uncertainty by making investment decisions within a time-tested, evidence-based investment foundation.

We can help you navigate uncertainty in your broader personal economy by making objective, personalized financial decisions.

Thereafter, financial success is a matter of separating uncertainty from our own reactive gut feelings.

This is especially true when it comes to politics, as the greatest living investor states during the first 33 seconds of this video:

“if you mix politics with your investment decisions, you’re making a big mistake”.

We hope it will help you to keep these thoughts in mind as the crescendo of noise peaks through November 2020.

If we can help you in any way, please reach out to us.