The presidential election is coming, and investors are shifting their tired, worrisome gaze towards the fall. We’re still battling the virus and dealing with racial tensions. Now we must add the election to the mix. Each political party, and legions of supporters, are convinced that the “other” party will tank the economy and the stock market once the election is over. Is this true? Will stocks fall if Trump wins? What about Biden?
On the heels of the 2016 election, the Brookings Institute projected that stocks would fall 10% to 15% if Trump won. In a CNN article, they wrote, “almost everyone on Wall Street currently predicts Hillary Clinton will win the White House.” They added: “A Trump triumph would likely cause investors to flee stocks to the safety of gold and bonds.”[1] Trump did win, and stocks have risen 44% from election day while bonds rose 26%, and gold has increased by 41%.
Since 1928, there have been twenty-three elections. The average annual return during these election years has been 11.28%, and 87% of the time, stocks finished the year in positive territory.
Fidelity has done extensive research on elections and market returns. It’s fascinating data. From 1789, the stock market has generated an average annual return of 9.1% during election years. The data below shows how the stock market performed under various election scenarios according to their report.[2]
- Republican President: Average annual return = 8.6%
- Democratic President: Average annual return = 8.8%
- Republican Sweep: Average annual return = 8.6%
- Democratic Sweep: Average annual return = 8.2%
- Republican President and Divided Congress: Average annual return = 8.7%
- Democratic President and Divided Congress: Average annual return = 10.9%
Fidelity’s study spans 231 years, so let’s review the stock market performance, as measured by the S&P 500, for our most recent Presidents.[3]
- William J. Clinton = 210%
- Barack H. Obama = 182%
- Ronald W. Reagan = 117%
- George H.W. Bush = 51%
- Donald J. Trump = 44%
- Jimmy E. Carter = 28%
- George W. Bush = -40%
The presidential election will stir up plenty of emotions and cause the stock market to gyrate considerably. However, the election will have little impact on your investment portfolio. Rather than worrying about the election, focus on your financial goals. A more significant impact on your wealth will be how much money you save and invest. If you save more than you spend, your wealth will increase. Allocating a large percentage of your assets to stocks may allow you to create generational wealth because stocks historically outperform bonds.
If you’re concerned the “other party” will destroy the market, you probably own too many stocks, or you have never completed a financial plan. A financial plan will help you determine the appropriate asset allocation so you can handle multiple market conditions. During the stock market correction this past March, we regularly checked our client’s plans to make sure their goals were still intact – and they were.
I recently talked with a client who was concerned about his rising expenses because of a home purchase. I informed him we factored in an increase in his living expenses for the next two years, so he was going to be okay. He said he was going to sleep well that night. A financial plan, your plan, will remove confusion, complexity, and worry so you can pursue things you enjoy.
Elections come and go, so don’t let political anxiety weigh you down every four years. Follow your plan, focus on your goals, save your money, invest often, diversify your assets, think long-term, and good things will happen.
Be sure to put your feet in the right place, then stand firm. ~ Abraham Lincoln
July 24, 2020
Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.
Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.
[1] https://money.cnn.com/2016/10/24/investing/stocks-donald-trump-hillary-clinton/ Heather Long, October 24, 2016
[2] https://www.fidelity.com/learning-center/trading-investing/markets-sectors/stock-returns-and-elections Jurrien Timmer, Director of Global Macro, Fidelity Management & Research Company
[3] https://www.forbes.com/sites/sergeiklebnikov/2020/07/23/historical-stock-market-returns-under-every-us-president/#4a589312faaf Sergie Klebnikov and Halah Touralai, Forbes Staff Writers, July 23, 2020