The Markets Don't Pick Sides
While Covid-19 has largely stolen the headlines this year, we expect an increasing focus on the presidential election as we enter the end of the year. In dealing with extreme uncertainty, we find looking to history can often be the best starting point to understand what comes next.
Since 1926, the average annual return of the S & P has been about 10%, whereas in presidential election years, the market has historically performed slightly better at just over 11%. During election years where the current President has been re-elected, or a different President from the same party has been elected, the S & P 500 averaged growth of 16%. However, when the parties switch, the return averaged just 5%.
One of the reasons for this is very simple – the fact that markets dislike change or the unknown. But generally, it seems more likely to us that the Presidency switched parties because the economy wasn’t particularly strong, rather than the Presidential campaign driving the market. It’s good to recall that Presidents don’t have as much power over the economy as most people think they do, but, for better or worse, that doesn’t really matter too much during an election. If voters think the president has control over the economy, they will vote accordingly. In short, what’s going on in the markets will tell you about the election, rather than the election telling you what will happen in the markets.
However, we understand that the Presidential election isn’t the only one on people’s minds, many also have concerns about who will control the houses of Congress as well. Over the past 94 years, there has been an equal number of years where the government was controlled by the same party vs being divided among parties – 47 years each.
History suggests that when the government is controlled by the same party, the market tends to get a bit of a lift in the first year before normalizing to a 3 year return roughly in line with historical averages.
While we’re cautiously optimistic about the election and the economic outlook overall, there are headwinds that are cause for concern. For example, unemployment remains at levels last seen during the Great Recession in 2008-2009. The lack of national strategy for dealing with Covid-19 has led to protracted recovery, stimulus talks in Congress have stalled, and geopolitical tensions continue between the U.S. and China.
In an average year, we tend to adjust strategic allocations quarterly but have already actively adjusted client portfolios 5 times to help keep clients ahead of rapidly changing market conditions, the most recent being October 9th. In 2016, we reallocated shortly after the elections, and anticipate making a similar move this fall. Our analysts will continue to closely monitor the market conditions and will continue to make changes to your portfolio based on your financial needs, goals, and risk tolerance.
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