The U.S. presidential debates are slated to commence on September 26th, and may prime investors to contemplate how the November 8th election will impact their wealth.
While we acknowledge that election years can elicit an emotional reaction from investors, and can impact the markets in the short-term (the markets typically do not “like” uncertainty), it is imperative during periods of market stress (such as the Brexit vote in June) to maintain a disciplined, goal-based investment approach. Emotional decision-making can jeopardize the long-term goals most important to you, and your family.
Links between party victories and market outcomes: tempting but inconsistent
In the coming months, there will likely be a flurry of pundits forecasting market outcomes tied to the potential election results. We fundamentally believe that implementing investment decisions based upon election outcome speculation is a deeply flawed approach. Investing in this manner is essentially a three-part parlay wager: correctly predicting the election outcome, correctly predicting the market’s reaction to the result and correctly predicting the economic and tax policies the winning candidate will implement.
Furthermore, there are conflicting results in equity market performance linked to victories by one party or the other. During election years, the broad U.S. equity market provided an average annual gain of +11.3% during Republican administration year victories versus +3.3% for their Democratic counterparts from 1928 through 2015 (Strategas Research Partners ). Conversely, the returns during election years were +9.7% in Democratic year wins and +6.7% in Republican year wins from 1945 to 2015 (S&P Global Market Intelligence). Regardless of party affiliation, the equity market has been positive in 18 of the previous 22 U.S. presidential election years (on average +11.2% since 1926).
Financial market implications: macroeconomic and policy factors prevail over political developments
Looking back on previous market performance, the equity market was negative in four U.S. presidential election years including, 1932, 1940, 2000 and 2008. While it may be tempting to believe political party affiliation was a key driver, macroeconomic factors (fiscal and monetary policies, corporate earnings growth, geopolitical tensions, currency fluctuations and demographic trends) dramatically outweighed political developments in terms of affecting market performance. Notably, during 1932 and 1940 we had the Great Depression, in 2000 the Dot-Com Bubble and in 2008 the Great Recession. Supplanting the relevance of political affiliation, market returns are more likely to be sensitive to the winning candidate’s (and Congress’) economic and tax policy reforms.
With the debates around the corner, and with both candidates providing more clarity about their respective policy goals, financial market volatility is expected to intensify. The imposition of trading tariffs, adjustments to the Affordable Care Act as well as potential actions by the Environmental Protection Agency have been advanced by one party or the other over the past few months. If enacted, policy decisions in these areas would potentially impact the healthcare, manufacturing and energy industries directly as well as consumer spending indirectly (consumer spending represents approximately two-thirds of the U.S. economic growth). Of course, given the nature of our political system, and the checks and balances which it affords, the actual degree of uncertainty is even greater.
While we are closely monitoring the developments of the upcoming election, we emphasize that the ability to adhere to a fundamentally-driven, diversified investment allocation will do much more to support one’s long-term financial goals than reacting to the speculation leading up to, and the eventual results of the presidential election.