Deja Vu All Over Again? The Market and the Elections
Even though we are only in the early months of 2024, with a surprisingly robust 2023 stock market performance fading in the rearview mirror, anxiety about the elections is already starting to become a topic at client review meetings.
According to the latest investor survey by Janus Henderson, a British-American global asset management group headquartered in London, the upcoming election is investors’ top source of anxiety as we head into 2024. While the economy thus far has avoided one of the most anticipated recessions, as unemployment remains near historical lows while inflation declines, concerns about the election can trump (pun intended) even the best-laid plans for an optimistic forecast.
So, what do we know so far about the election?
Even though we are in the early stages of the election cycle, it appears a rematch between Biden and Trump is a highly probable outcome. Biden faces minimal opposition to the Democratic Party’s endorsement, while Trump has won GOP primaries handily in Iowa and New Hampshire as of this writing. Certainly, something could change, but at the moment it appears like it’s “déjà vu all over again,” as the great baseball player Yogi Berra once said.
The question is, does it matter—at least from an investment perspective—who wins the election?
A review of historical data indicates that there is minimal correlation between national election outcomes and capital market performance. Even though election results can impact government policy, laws and foreign relations, data studied over the past 85 years indicate there is minimal impact on financial market performance based on possible election outcomes.
The average return of the S&P 500 Index between 1937 and 2022 shows that election-year returns have on average been positive for portfolios. Specifically, the average return from 1937 to 2022 of the S&P 500 was 11.9%. In non-election years, it was 12.5%, and in election years it was 9.9%, according to Janus Henderson. So, while election years have been less accretive to portfolio returns, they still have historically been positive.
Conversely, economic and inflation trends show stronger and more consistent effects on market returns than election outcomes. Generally, rising growth and falling inflation are a combination that has led to returns above long-term averages while the opposite corresponds to below-average market returns.
This does not mean there will never be a negative impact on the markets due to the election cycle. Policy changes can affect individual or corporate tax rates, as well as certain sectors and industries. But the actual election is unlikely to create anything more than short-term volatility. For long-term investors, this is unlikely to have a meaningful effect on financial goals.
So, if this is true, why are investors still full of anxiety and what should they do about it?
Here are a few ways to assuage concerns and keep calm during the next several months of daily doses of election updates.
The 24-hour news cycle and social media have been major contributors to the reason investor anxiety has risen over the past several election cycles. Combined with financial concerns, this formula makes emotions run high and allows uncertainty to rule the day. This can lead to poor decisions, which can impact our long-term financial goals.
First of all, remember that your time horizon is an important consideration for the allocation of your investment portfolio. If you are pre-retirement or in the early stages of retirement, you could have a 20-30 year time horizon. Therefore, time should easily smooth the volatility inherent in capital markets. Review your allocation to ensure it is appropriate for your long-term goals, rebalance if necessary, and stick to your strategy.
But if you are in the later stages of retirement, perhaps a review of your allocation—and some adjustments—could ease some of your anxiety. After all, a shorter time horizon means less time to recover from market downturns. Perhaps a less risky portfolio, with a higher amount in cash or fixed income, could be considered. A review from your financial professional can help you see the impact of this on your overall plan.
Besides the financial impact of the election, there is also an emotional impact that cannot be discounted. Since it is such a polarizing event, full of often nasty rhetoric, it is important to protect yourself from becoming overwhelmed from the frenzy. Stay informed, but don’t let the news rule your day. It is a long cycle, and your mental-and physical health are more important than the outcome of one election.
No matter what, stick to your financial plan. If it needs updating, this is a great time to do it, as you may not be able to control the election results (besides voting)—but you can control your own financial picture.
This election year will eventually be over, make it a year of financial fitness and you will be in a better position to endure the outcome.
Laurie Haelen, AIF (accredited investment fiduciary), is senior vice president, manager of investment and financial planning solutions, CNB Wealth Management, Canandaigua National Bank & Trust Company. She can be reached at 585-419-0670, ext. 41970 or by email at lhaelen@cnbank.com.