How Does the Election Affect Your Portfolio?
Well, another Election Day is coming up and I am thrilled. Why? Is it because I am SO excited about the two potential candidates that I can’t wait to cast my vote? Not exactly.
The benefit of Election Day to all investment advisers is that hopefully for the next 3 ½ years we can get a break from people asking how I think the election will affect the stock market. The answer is I don’t know and neither do all of these so called experts on TV making predictions.
For those of you who find comfort in numbers, here are some historical facts around elections, parties in power, and stock market returns as measured by the S&P 500:
- Presidential Election Years: +7.4%
- Incumbent Party Wins (doesn’t matter what party!): +14%
- Incumbent Party Loses (ditto): -4.4%
- Democrats Win: +4.3%
- Republicans Win: 3%
The above returns are just one year numbers and…they are in a vacuum.
What about if the incumbent party is Democrat and the Republicans win, and of course, it’s a Presidential Election Year? Will the stock market return 7.4%-4.4%+10.3% = 13.3%? Who knows?
Here is another favorite topic of debate: What political party is better for the stock market? Again, there isn’t a very clear answer because it’s not just about who is President, but also who is controlling Congress. And it’s probably not caused by either factor, but what is happening in the world economy at any given time.
Below are average annual returns of the S&P 500 from 1901-2016 in different political climates:
- Democratic President/Republican Congress: +8.6%
- Republican President/Democratic Congress: +2.4%
- White House/Congress controlled by the same party: +7.1%
- Democratic President/Split Congress: +10.4%
- Republican President/Split Congress: -4.3%
Now, how helpful is this information to helping you make investment decisions in an election year?
Not at all helpful!
Since Congressional elections happen every two years in some form, these combinations of Presidents/Congress are constantly in flux.
Here is what you can do in an election year and all other years:
- Have a well-diversified, low cost portfolio
- Don’t try to time the market – stay the course through ups AND downs
- Save, save, and save more
- Control your spending and don’t go into debt buying elephant or donkey buttons
Special thanks to MFS Investments for the fantastic study that I quoted in this blog. Click here for the whole thing.