Every four years the pundits and talking heads like to discuss the impact of elections on markets. While we always need to keep in mind that past performance doesn’t guarantee future results this is perhaps truer with this election cycle than ever before.
This year’s election seems like Alice in Wonderland as we have two very non-traditional candidates in Bernie Sanders and Donald Trump who strangely share some similar ideas despite being polar political opposites as a self-proclaimed socialist and ultra-capitalist. Both candidates, especially Donald Trump, make comments that would in the past have eliminated them from the election but this year seem to increase their popularity.
“But I don’t want to go among mad people,” Alice remarked.
“Oh, you can’t help that,” said the Cat: “we’re all mad here. I’m mad. You’re mad.”
“How do you know I’m mad?” said Alice.
“You must be,” said the Cat, “or you wouldn’t have come here.”
― Lewis Carroll, Alice in Wonderland
As Mark Twin is attributed for saying “History doesn’t repeat itself but it often rhymes”. So before looking at where we are today here is some historical perspective.
Wars, bear markets and recessions tend to start in the first two years of a president’s term, says The Stock Trader’s Almanac; bull markets mark the latter half. Since 1833, the Dow Jones industrial average has gained an average of 10.4% in the year before a presidential election, and nearly 6%, on average, in the election year. By contrast, the first and second years of a president’s term see average gains of 2.5% and 4.2%, respectively. A notable recent exception to decent election-year returns: 2008, when the Dow sank nearly 34%. (Returns are based on price only and exclude dividends.) In the 22 president elections since 1928, 14 were preceded by gains in the three months prior. In 12 of those 14 instances, the incumbent (or the incumbent party) won the White House. In seven of eight elections preceded by three months of stock market losses, incumbents were sent packing. Exceptions to this correlation occurred in 1956, 1968 and 1980.
Having said all of that not only is this Presidential race is unique but the entire election cycle is not consistent with past experience. The Dow Jones Industrial Average was up 27% in the first year of President Obama’s second term, and 7.5% in year two. Last year (2015), which was supposed to be the strongest of the cycle, saw the Dow industrials drop 2% helping to prove why past performance doesn’t guarantee future results.
In terms of which party may be better for the markets conventional wisdom might suggest that Republicans, who are supposedly more business-friendly than the Democrats, would be more beneficial. In fact, looking back to 1900, Democrats have been slightly better for stocks, with the Dow up an average of nearly 9% annually when the Democrats are in control, compared with nearly 6% per year during Republican administrations.
One popular theory suggests that the incumbent party leverages economic policies to give the market a slight nudge just before election time, then allows the market to appropriately correct itself once elections are over. Another theory proposes that investor confidence tends to rise based on the lofty promises of candidates vying for office, then tapers off as some of those promises fall by the wayside.
Regardless of which theory, if any, you choose to believe, it’s important to remember that traditional fundamentals, and public perception, always impact markets. Isolated factors such as political elections never explain the whole story. More importantly, in our opinion, predicting what the broader markets will do is not only difficult but not relevant for people who have a strong comprehensive plan. Proper proactive planning should take into account both anticipated volatility and unforeseen events so that they will not affect your ability to maintain and enhance your lifestyle. We have developed and refined a proprietary process for doing this called Personal Vision Planning ™ . This is what we utilize with our clients to help simplify their lives while protecting and enhancing their lifestyles.
So where do we go from here? Ultimately who wins the Whitehouse may matter less than the overall political landscape of the House and Senate once the dust settles. Broad markets can handle bad news and also good news but become very volatile when there is uncertainty. Until we have more clarity on the political landscape, and policy direction of whomever prevails, we anticipate continued broad market volatility. Regardless of the outcome we believe there will be strong growth for the domestic equity markets over the next three to five years. As interest rates rise long term fixed income investments will under-perform. Many may miss the opportunity for growth as they focus on negative social issues such as higher inflation and unemployment. As always we recommend a broadly diversified asset allocation that includes cash and short term fixed investment for any near term needs to so that market and portfolio fluctuations do not impact you or your lifestyle. If nothing else the election will be good political theatre!
Please note that will be hosting Andy Friedman for two exclusive events on September 7th (7 pm) and 8th (8:30 am) at LaMalfa Center in Mentor OH. According to CNBC, Andy Friedman is “one of the nation’s most sought-after speakers on all things political.” If you would like to attend there is neither a cost nor any obligation; however due to limited space reservations are required. Please contact our office (440) 974-0808 or click here to reserve space.