Patience, patience, patience. In the final week of this election cycle, there is no better investment advice I can offer to clients than to be patient. This marks the 8th presidential election I have witnessed during my career in the investment industry. Of the 28-years I have spent in this business, 16 have seen a Democrat in the White House while 12 have seen a Republican.
In every case, emotions ahead of the election overwhelmed sensibilities. In every case, approximately half the country was disappointed while the other half was satisfied. Further, in the days, weeks and years that followed, the sun rose in the east and set in the west, businesses were created, educations were earned, retirements, births, deaths, etc., continued on. Life went on.
I started my career in June 1992 after graduating from Butler University. In June of 1992, the Dow Jones Industrial Average stood at 6,159. As I write this, it stands at 27,692. This represents a 350% increase over 28 years or 12.5% annualized rate of return. I will spare you the litany of historic events that have occurred during my career, but the list involves war, drought, famine, pandemic, terrorism, etc. The list also includes advances in technology, medicine, and global economic expansion.
In 1992, the largest companies (by market capitalization) were Exxon, Philip Morris (now Alria), GE, Merck and IBM. Today the list is: Apple, Amazon, Microsoft, Alphabet (Google) and Facebook. It is worth noting that 3 of the companies (Amazon, Alphabet and Facebook) did not even exist in 1992. In the case of Facebook, its founder had just turned 8 years old a few days before I received my Butler diploma.
My point with this trip down memory lane is to put into perspective the relationship between presidential elections, economic growth, and market performance. Could one argue that the advances I highlight during this period are the result of Democratic policies since they controlled the White House for more years than the GOP? Maybe. Could one argue that because the House of Representatives was controlled by Republicans in 18 of the 28 years, the laws that were passed led to the 3-fold increase in stock prices? Maybe. However, you would be on soft ground to make either case.
For this reason, at KIG we do not allow political bias of any kind guide our investment decisions. History has shown that politics play a small role in determining the direction of stock prices. It is Federal Reserve policy that plays a far more significant role in the direction of stock prices.
To further our view that elections do not lead to wide swings in stock prices, let us look at how stocks have performed during past election cycles. To do so, I have listed the performance of the S&P 500 Index from October 1 through November 30 in each of the last 5 presidential elections.
- Oct.-Nov. 2000: -8.5%
- Oct.-Nov. 2004:+5.3%
- Oct.-Nov. 2008: -23.0%
- Oct.-Nov. 2012: -1.6%
- Oct.-Nov. 2016:+1.5%
The two standouts are 2000 and 2008 when we saw negative results for stocks surrounding the election. These are easy to understand when one recalls that in 2000 it took a full month before the election was actually decided and in 2008 we were in the grips of the greatest financial crisis since the Great Depression. The other 3 periods saw modest volatility with a slightly positive bias. While there is fear that this year’s election may not be determined on election night, it is a “known” risk. In 2000 it was a total shock to the market. The point is, there is little evidence to expect a big swing in stock prices this time.
What about 2020, though? Well, while no one knows who will win the election, it will be one of two people. The polls suggest it is a close race. This means the market is unlikely to be surprised by either candidate winning. Surprises are the biggest threat to stock prices and we simply do not see many surprises.
There are many scenarios we have penciled out that will have an impact on short-term stock prices. These scenarios include the impact of COVID, economic stimulus, tax policy, vote counting issues, etc. We will adjust our outlook based on the outcome of the election, but this is a far cry from expecting a collapse or rally in stocks. While the election result will be binary (Trump or Biden), it does not mean the fortunes of the stock market are binary.
So, like most of you, we will be rooting for our preferred political outcome. But, when it comes to making investment decisions, our attention remains focused on more important influences like Fed Policy, corporate income statements, consumer behavior, etc. To wit, we do not expect the election to lead to a dramatic swing in stock prices.
Kessler Investment Group
All information above is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. All economic performance data is historical and not indicative of future results. The market indices discussed are unmanaged. Investors cannot invest in unmanaged indices. Certain statements contained within are forward looking statements including, but not limited to, statements that are predictions of or indicate future events, trends, plans or objectives. Undue reliance should not be placed on such statements because, by their nature, they are subject to known and unknown risks and uncertainties. Please consult your adviser for further information.
Opinions shared are not intended to provide specific advice and should not be construed as recommendations for any individual. Please remember that investment decisions should be based on an individual’s goals, time horizon, and tolerance for risk.