3 Myths About the Stock Market in an Election Year

by | Oct 6, 2020

Every four years, we are essentially told the fate of the world hangs in the balance of which presidential candidate wins the election. This narrative is used by both major political parties in the U.S. However, historical data tells a different narrative, and it’s one that debunks some of the most common myths about the stock market in an election year.

Here are three myths to consider this election year.

1. The Stock Market Will Only Go Up if My Party Wins

This one is easy to debunk. Why? Because if you look back to 1936, there have been 7 Democrat and 7 Republican Presidents of the United States. During that time, that stock market has seen several conflicts ranging from major World Wars, economic crises, domestic and global tensions, hyperinflation, oil crises, etc., but has continued to rise.

However, just a $1,000 in the S&P 500 made when Franklin D. Roosevelt took office would have been worth over $14 Million as of the end of 2019. The stock market has trended upward with both Republicans and Democrats holding the Presidential office.1

In fact, if you consider the 10-year performance of the S&P 500 starting in the year that each president was elected, you’d find that the best and worst outcomes came during Republican presidencies, leaving little to no evidence that one party is guaranteed to influence the market in a more positive way than the other.1

2. “Getting Out” of the Market Near Elections is the Safe Play

The general environment around election time can be hostile, which is especially true in 2020. Markets don’t like uncertainty or hostility and thus, it would seem that “getting out” of the market by temporarily selling stocks would be the safer way to go.

But, according to Capital Group, this is not always true. They analyzed three different election-year investment strategies over the 22 election cycles dating back to 1932 and measured the outcome after a four-year holding period. The strategies they examined were remaining fully invested, making consistent contributions, and “sitting on the sidelines.”

The first strategy assumes an investor invests their full portfolio on January 1 of an election year. This strategy resulted in the best outcome 14 out of 22 times, while providing the worst outcome only 6 times.1

The second strategy of making consistent contributions throughout the election year resulted in the best outcome 5 of 22 times, and the worst outcome 0 times.1

Lastly, sitting on the sidelines, or selling and waiting until January 1 in the year after the election, resulted in the best outcome only 3 of 22 times, and resulted in the resulted in the worst outcome 16 times!1

While sitting on the sidelines until after the election seems like it would be the safe play, it has led to the worst outcome far more than simply staying fully invested or making consistent contributions throughout the year.

3. The Market is More Volatile Near the Election

Another myth that investors have subscribed to is that the stock market is more volatile near an election, but again, the data shows otherwise.

Vanguard analyzed the S&P 500 from 1964 through 2019 and found the annualized volatility to be 15.7%. Then, they analyzed the annualized volatility of the S&P during the 100 days before and after a presidential election and only found volatility to be 13.8% during those periods.2

In other words, the S&P 500, or what most refer to as the “stock market,” has been less volatile near elections than it has over the full period from 1964-2019. Simply stated, the stock market has not been more volatile near elections.

How to Move Forward

It’s a unique time to be alive. Tensions seem high and uncertainty is looming. However, being a stock market investor, and being a successful one, usually means being able to tune out the noise of whatever the major crisis is at the time. The stock market has endured consistent crises over the last 100 years and has still risen substantially over the long-term, which is a key thing to remember.

Investing in stocks is a long-term game. If you don’t have a long-term time horizon (at least 10 years), then you probably shouldn’t be investing in stocks. But, if you have time on your side, then history would suggest that you treat election years just like any other year and stay invested.

These can be big decisions and you should never take your advice from a general, educational piece like this one. As always, you should consult with an investment professional for help on your specific situation.

 

1. Capital Group Election Investing Guide; https://mcusercontent.com/1dafc4cb3de4e55b427560b18/files/99cd8e0d-666f-42e7-a751-9f6e5442a6c1/Capital_Group_2020_Election_Guide.pdf

2. Vanguard Election Guide; https://mcusercontent.com/1dafc4cb3de4e55b427560b18/files/49b49cc0-5b5c-4b40-ab93-a6d1ba075389/Vanguard_2020_election_guide.pdf

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