By Brian Gooding | Special to the NB Indy
It’s 2024 and another election cycle is in full swing. With the upcoming presidential election, we can expect an uptick in political events, commercials, and debates across parties.
Americans are increasingly taking a more active interest in national elections, and for many, they can be a source of angst. Elections can even influence the way we make decisions and invest, with some business owners and investors tending to take a more risk-off strategy, such as in looking to fixed income securities, when the party they identify with is not in the White House.
Elections can make investors nervous – but should they? A recent Gallup poll revealed 63 percent of American voters surveyed agreed both political parties do a “poor job” of representing their interests. However, simultaneously, independent and third-party candidates often fail to receive the support needed.
Whether you are a Democrat, Republican, or Independent, what do you need to know as you are navigating the election season and making decisions about investments and life for the next four years?
The economy, as usual, is a major part of election discussions, as jobs, taxes, and even the balances of investors’ 401k investments are brought into debates. Economists note that in the final two months of 2023, a 60/40 portfolio of equities and bonds delivered its third-best two-month return in at least three decades.
Despite some volatility, the Dow Jones Industrial Average (DJIA) reached a record high on February 23, 2024, at 39,282.28 points in intraday trading. Then on March 21, 2024, it closed in on the 40,000 threshold for the first time in its 128-year history as markets rallied to new highs; the DJIA rose 269.24 points, or 0.7 percent, to 39,781.37. The Nasdaq composite rose 32.43 points, or 0.2 percent, to 16,401.84 that same day. What’s next?
Leading up to national elections, many investors worry that things will be significantly different economically if their preferred candidate doesn’t get elected, with the potential to wreak havoc on capital markets and one’s investments. Should investors be nervous about their financial accounts during presidential election years, especially this one? And if we are sitting at all-time highs, does that mean it’s time to hit the panic button and get out of the markets?
If history is any guide, UBS analysis shows that extreme anxiety is not typically warranted. Over the past 60 years, in the one-, two-, and three-year periods following a new all-time high, S&P 500 returns have averaged 12 percent, 23 percent, and 39 percent, respectively. This is hardly different from the 12 percent, 25 percent, and 38 percent average returns for all other periods over the same timeframes.
Also historically, in election years, once nominees are identified, markets tend to regulate. Then, in the 12 months following the primaries, they often bounce back. In fact, according to a recent report from Capital Group, since 1932, stocks have gained an average of 11.3 percent in the 12 months following the conclusion of the primaries (using May 31 as a proxy) compared to just 5.8 percent in similar periods of non-election years.
With few exceptions, national polls should be treated with skepticism in how they could impact the stock market. As reported by UBS, fiscal and regulatory policies may affect the performance of specific asset classes in the short term and should be monitored. However, longer-term portfolio management decisions should be considered aside from politics.5 One’s political biases can have a counterproductive impact on longer-term investment performance by encouraging risk-averse behavior during times when securities may be undervalued or market opportunities might be attractive.
Investors should also not put too much emphasis on political parties when it comes to companies’ stock prices because the latter tends to depend primarily on the company’s numbers, such as its cash flow, asset returns and profit and loss history.
The markets tend to prioritize company fundamentals over politics, politicians, or political parties when it comes to stocks. With only two dozen presidential elections having been held since 1928, it is also important to note that there simply are too few data points to reach a statistically defensible conclusion on the political impact of one party or another on market behavior.
During election cycles, those running for election or reelection try to effectively position their policies and how they would affect the economy, whether or not the policies will actually be implemented. Then, once voting results and the new president are announced, there’s usually a sense of optimism that makes its way through the equity markets. Investor optimism is felt both by those anticipating constructive economic change because of the newly elected candidate AND/OR those happy that the status quo has remained with the incumbent politician getting another term.
At least half of voters are left feeling the country is headed in the right direction; this optimism flows through to many places, including the stock market.
That explains why markets traditionally do well leading up to and shortly after elections. Policy, conversely, takes months to draft, then is scrutinized by the Congress, the Courts, and The Federal Reserve. America’s founding fathers had the foresight to create a system of checks and balances to keep policy fairly level and prevent leaders from pushing through unchallenged agendas.
With about half the people that voted being optimistic that the economy will likely be in positive territory, despite the bias they may feel against the opposing party, cooler heads tend to prevail.
Ultimately, our free-market society thrives on corporate earnings and fundamentals. Try not to let election ads or your own personal biases make you take an emotional response to investing.
Worry is not productive and doesn’t change anything. Just vote your conscience because that’s all you can do – and then work with your financial advisor to develop a plan that works for you and your family’s long-term goals and needs.
While it may be true that some fiscal and regulatory policies can affect the performance of individual investments or asset classes in the short run, longer-term portfolio construction should be treated as a personal exercise.
Brian Gooding is Senior Vice President, Wealth Management at UBS Financial Services Inc. with Newport Legacy Wealth Management in Newport Beach. He can be reached at Brian.Gooding@ubs.com.
