Episode 88: Do Presidential Elections Impact Your Investments

Transcript

Hello and welcome to the balanced wealth podcast. My name is Gavin DiStasi and today we’re going to talk about presidential elections and the stock market. Specifically, whether or not the presidential election has a significant impact on stock market returns.

This election season has already been one for the books. I doubt that I have to recount for you all the unprecedented things we have seen so far and the uncertainty surrounding the upcoming election, so I’ll assume we’re all up to date on where we stand politically and try, as best I can to avoid wading into that arena in todays podcast. What I would like to talk about is whether the extreme rhetoric or the eventual outcome of the election are likely to have any real effect on the performance of the stock market.

The bottom line is that no one knows for sure, just as no one can accurately predict the short term movement of the market in any conditions, so to be certain, we will just have to wait and see. However, we can look to the past and get a sense of whether or not presidential elections generally have had an effect on the markets throughout history.

Now, I think it’s important to address the elephant in the room, which is one of the narratives around this election that differs slightly from previous versions. Especially the idea that many folks, particularly in our area of the world, have about the ramifications of a return to the presidency for Donald Trump. This idea that democracy as we know it will cease to exist if he is re-elected in November. I won’t get into my personal thoughts on that here, but suffice it to say that if something as drastic as a move towards a truly fascist state were to occur, then comparisons to past elections become much more difficult, if not impossible.

In that case though, as we often tell clients about other complete societal breakdown scenarios when they are brought up, we simply don’t have a contingency for those. If the world completely falls apart, if democracy fails, or if we’re struck by a meteor and the earth turns into a mad max style desolation, well, there isn’t a hedge for that. And one of the reasons is that we don’t know what will become most valuable in those scenarios. Will it be gold? Perhaps, but maybe not. Maybe it’s water that becomes most valuable, and all that gold you buried in the backyard is simply a bunch of pretty rocks. Petrol, copper, influence, who knows.

All we know for sure is that if we do have some kind of complete breakdown of the order to which we are accustomed, it is very likely that how your investments are performing will not be your primary concern for long.

The bottom line is that we want to avoid falling into the trap of looking at this election, when it comes to our long-term investments, and saying the four most damaging words in investing: it’s different this time. Even if, or especially if, our gut tells us it is.

So, if we put our worst fears aside for a moment and assume that whichever way this thing goes, while it may be an uncomfortable and tumultuous time ahead for many of us, it will essentially be just that, what we’re left asking is, do elections actually matter for the performance of the markets, and if so, is it enough to alter my long term plans.

I suspect the vast majority of listeners will already know our answer to at least the latter question, so let’s just get it out there. No. Do not alter your well thought out, long term investment management strategies, based on the short term outcome, or potential outcome of this, or any other presidential election.

You knew I was gonna say it, so there it is.

Ok, but what does the data actually say? According to T Rowe Price, between 1928 and 2023 there have been 24 presidential election years and the s&p 500 has returned just over 11% per year on average. In addition, in 20 out of those 24 years, the market was higher. The four years it was down in an election year – 1932, 1940, 2000 and 2008. Well, you might recognize some of those years, 1932 the great depression. 1940 the start of World War 2, 2000 the dot com bubble burst, and 2008 the housing crisis and depth of the so-called great recession.

And what that tells us is that the election itself had very little influence on the market. What did have an influence were the economic conditions in place during those years. And that’s what always impacts markets most, to be honest. We want it to be about who is president, or more accurately, the media wants it to be about that, but it just isn’t.

In just this past week I’ve read headlines suggesting the movement in the daily price of the market is attributable to bets that Trump will win, that Trump will lose, that Biden will win or lose and that Kamala Harris will win or lose. And you know what? None of it is true. It just fits a narrative and is designed to get clicks or likes or whatever the particular media outlet is after to increase their advertising revenue.

And even if we’re tempted to say that this is all unprecedented and it is different this time, well we actually have some data for both of the current candidates from the past. At least sort of. In the runup to the 2016 election, I had quite a few clients who were panicked and asked about pulling all their money out of the market fearing Trump would be elected. And they were citing many of the same concerns we’re hearing this time around. But the S&P 500 returned 12% that year. Similarly for Biden’s election year in 2020. After Trump famously said the market would tank if Biden was elected, it returned 18%. I know Biden is not Harris, but a decent proxy I would suspect.

Now I want to be clear that I’m not trying to minimize the importance of this election in general, and maybe it is the most consequential election of our lifetimes. There are certainly a number of vital issues at play with huge ramifications for the future. And I definitely have strong opinions in this matter so if anyone wants to talk to me about them, just give me a call and we can chop it up all day. But when it comes to managing our investment portfolios, it is vital to maintain discipline no matter how difficult it can be at times, and resist the temptation to let emotion and fear derail our long term plans. In the end, when it comes to long term investing, we must continue to avoid those four fateful words –  it’s different this time.