By: Joe Delaney
It’s the month in which we celebrate our nation’s declaration of its independence, a good time to examine what we as a nation do to ourselves every four years as we practice the political system our forefathers created.
Specific to the financial services industry is that question that has never, and will never, go away. What effect will the process and result of electing a new president have on our investment portfolios?
That’s a tough nut to crack. The most important thing to start with is an understanding of how often statements of fact are really just myths that continually need busting.
Myth #1: Presidential election years are a bad time to invest because the markets are too volatile.
Actually, the Dow Jones Industrial Average (DJIA) tends to rise about double a typical annual gain in election years in which the incumbent is not running for re-election. There were some impressive leaps in the DJIA in presidential election years that far exceed the 13% average; when Herbert Hoover was elected in 1928 the Dow rose 48.22%.
Of course, this dramatic performance was quickly forgotten when the nation plunged shortly thereafter into the Great Depression. This begs the question, does a down year inevitably follow an election year?
Myth #2: Sell off high-risk stocks before the general election because markets are more likely to decline after the winner is announced.
True … if you’re talking about the first half of the 20th century. Yale Hirsh’s “Presidential Election Cycle Theory”asserts that markets are weakest in the first year of a new president’s term and steadily improve until a new president is elected.
This trend hasn’t been the case for decades. The George H.W. Bush and Bill Clinton presidencies both showed very strong performance in their first years, for example.
Myth #3: A Republican in the White House will be best for market performance.
Surely markets will react more positively to seeing the more “business-friendly” party in power, right? While this belief can affect the behavior of individual investors sensitive to the political climate, whether a Democrat or Republican is in the White House actually has “no statistically significant impact on U.S. equity markets.”
Certainly the uncertainly or hopefulness inspired by presidential elections have had some historical effect on markets, but to what degree should we factor them into our decision-making process for investing?
Myth #4: Historical data for market performance in presidential election years is the bestindicator of what to expect this cycle.
We certainly hope you don’t believe this myth! Whatever data appears to justify a presidential-year stock strategy, there is always another interpretation to contest it. While the above data indicates a trend of the DJIA increasing in presidential election years, there doesn’t appear to be any election cycle trend on the S&P 500.
Better indicators of stock market performance may include economic conditions, but those are understandably less popular harbingers. Assessing the state of the economy is a lot more complicated than betting on a president or political party.
Fact: The best bet is on the will of the markets to sustain themselves and grow over the long term.
We monitor portfolio performance over years and decades, not election cycles, and certainly not single election years.
So whatever happens this fall, remember that as far as your portfolio is concerned, the results won’t matter nearly as much as you think. However, having a broadly diversified, evidenced based portfolio will certainly shift the odds of financial success in your favor over the long term.
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The opinions expressed by myself and other featured authors are their own and may not accurately reflect those of Lifeguard Wealth. This article is for general information only and is not intended to serve as specific financial, accounting or tax advice.
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