Here We Go Again...and Again

May 02, 2024

Back in 2020, I wrote a quarterly letter to clients titled, “Here we go again.”  It was an election year, we were dealing with the COVID crisis, and there was unrest in cities across the country. Well, we may no longer be complaining about wearing masks or worrying about social distancing, but “here we go again.”  It’s an election year, with the same two candidates, we are still dealing with COVID—specifically, the economic after-effects of the government’s monetary response to the crisis (i.e. stubborn inflation)—and there is unrest in cities across America once more.

Today, some familiar questions are starting to resurface. Should we be doing something to protect assets?  Raising cash or repositioning the portfolio to somehow take advantage of the outcome, etc.? The truth is elections and cultural and geopolitical crises tend to impact our emotions much more than our investments.   We’ve been doing this long enough to know that abandoning long-term plans to place ‘bets’ on what we think will happen in the short run can do far more damage to our financial well-being than sticking to the plan and absorbing any temporary drawdown that might materialize.

Take 2016 for instance. Up to election day, and even through election night, Hillary Clinton was expected to win the Presidency. Many people went to bed thinking she did, only to wake up and learn Donald Trump was victorious. Overnight global markets plummeted, US stock futures plunged, and trading on the New York Stock Exchange was halted. Yet, by the end of the day following the election, the Dow Jones Industrial Average closed up 1.4%, while the S&P 500 and NASDAQ each posted gains of 1.1%. At one point in the year, stocks (as measured by the S&P 500) experienced an 11% drawdown yet finished the 12 months with a gain of 10%.

Had investors reacted to their emotions and sought the perceived safety of bonds or cash at any point during the election year, they would have cost themselves greatly by moving away from stocks. The ramifications in 2020 would have been magnified even more when you consider that at the depths of the COVID Crisis, the S&P was down 34% but ended the year up 16%. That’s a 50% differential! Guessing wrong there could have had very severe consequences on the overall success of one’s plan.

I know many of you may have seen this chart already, but I think it’s worth revisiting in this context because it helps to reinforce that even though people may think election years bring heightened volatility (risk) and below-average returns the actual numbers over a 4-year forward show otherwise. Meaning, if you just leave your portfolio as is you are likely to experience fairly consistent outcomes over the cycle.

Source: Morningstar Direct and Investment Company Institute (ICI). Average 4 Year Forward Return & Risk (Standard Deviation) (1/1/1985-12/31/2022):  S&P 500 Index, figures are based on 4-year annualized averages starting on January 1 for each election segment. Average Net Flows: Morningstar data from 1/1/1993-8/31/2023, US Equity: Active and Passive Mutual Funds, Cash: Money Market Funds, ICI data from 1/1/1985-12/31/1992: US Equities: Long-Term Mutual Fund Flows, Cash: Money Market Accounts. Index returns represent past performance, are not a guarantee of future performance, and are not indicative of any specific investment. Indexes are unmanaged and cannot be invested in directly. As advisors, we sit in a pretty unique position in election years in that we have clients on both sides of the aisle, and we often hear that most of the problems we are dealing with tend to fall squarely on the shoulders of the opposing party. It never seems to fail—if Democrats are in control the Republicans usually aren’t happy, and when the Republicans are running things Democrats feel things could be better. 

As advisors, we sit in a pretty unique position in election years in that we have clients on both sides of the aisle, and we often hear that most of the problems we are dealing with tend to fall squarely on the shoulders of the opposing party. It never seems to fail—if Democrats are in control the Republicans usually aren’t happy, and when the Republicans are running things Democrats feel things could be better. 


Source: Pew Research Center, J.P. Morgan Asset Management. The survey was last conducted in January 2024, "Americans More Upbeat on the Economy; Biden's Job Rating Remains Very Low." Pew Research Center asks the question: "Thinking about the nation's economy, How would you rate economic conditions in this country today...as excellent, good, only fair, or poor?". S&P 500 returns are average annualized total returns between presidential inauguration dates. Real GDP growth are average annualized GDP growth rates. Guide to the Markets - U.S. Data are as of March 31, 2024.

In reality, the markets are going to do what the markets are going to do regardless of which party is in the White House or has control of Congress. This is largely because no matter what is going on in Washington D.C. businesses across the country will continue to try to maximize profits for their shareholders. Sure, some policies, such as tax rates and regulations, may have a modest impact on companies, but their objectives don’t change. That is why we have charts that look like this:

Source: Schwab Center for Financial Research, with data provided by Morningstar, Inc. The chart above shows the growth of $1 invested in a hypothetical portfolio that tracks the Ibbotson U.S. Large Stock Index starting on January 1, 1961. January returns in inauguration years are assumed to be under the party that is being inaugurated. Returns include investment of dividends and interest. For illustrative purposes only. The policy analysis provided by the Charles Schwab & Co., Inc. does not constitute and should not be interpreted as an endorsement of any political party. Indexes are unmanaged, do not incur management fees, costs and expenses, and cannot be invested in directly. Investing involves risk, including loss of principal. Past performance is no guarantee of future results.

We get it, it’s not that politics don’t matter. It’s just that they tend to have a much greater impact on social and cultural issues than they do on financial markets. So, as the trusted professionals you have hired to help you make smart decisions about your money, we work to disentangle emotions from investing and keep politics out of your portfolio.