Does the Election Matter?
The presidential election has generated especially strong emotions this go-around. Both sides fear the other candidate will win and many believe that as a result the economy will go into a death spiral. This fear is driving many investors out of the market, waiting on the sidelines for the outcome.
A recent survey by The Tampa Bay Business Journal found that fully 60% of respondents are delaying investment decisions until after the election. A look at past elections and market returns suggests they’ll be missing out.
PRESIDENTIAL CYCLE S&P 500 ANNUAL RETURN (1951 - 2015)
Source: AthenaInvest and Standard & Poors
The chart above shows the average returns for each of the four years in the presidential cycle looking back 65 years. In election years from 1951-2015, annual market returns for the S&P 500 averaged nearly 10%. Returns declined slightly in subsequent years, averaging around 9.5% for each of the two years after the election. The stunning year is the third year after the election, or the year before the next election, which saw a return twice that of the other three, averaging nearly 20%.
Some suggest that this spectacular performance in the year prior to the election and the higher return in the election year is a result of monetary and fiscal stimulus applied to help the current party retain the White House. This maneuver may also contribute to lower returns in the year following the election. Politics may indeed impact the market.
We would all prefer to invest only in the third year which has the highest average return. But, of course, it only comes around every four years, so we must decide what to do the other three years. Historically, each of these years produces a return of nearly 10%, so given available alternatives, it makes sense to remain fully invested throughout the presidential cycle.
From the Behavioral Viewpoint
What is going on?
- The emotional response to the election is a classic example of an availability cascade in which a topic so dominates every aspect of our daily lives that it spills into our decision making in all areas. This spillover of emotions is a self-reinforcing cycle that eventually creates a collective belief based on the availability and proliferation of ideas fed by political campaigns.
- For many, the intense emotions around the election can be driven by a recency bias, in this case an overemphasis on events and outcomes that occurred when a party was last in office. An overconfidence bias also comes into play with investors thinking they can predict future economic and financial implications of a given candidate winning the election.
- Both the markets and investors don't like uncertainty and elections create a systematic uncertainty for everyone, increasing volatility in the markets. Investors often perceive short-term market swings to be a vulnerable situation so they make themselves feel more secure by "getting out of the market".
What can we do?
- Investors aren’t wrong to focus on the election results as the direction of policy will be largely determined by their votes. As the two candidates are proposing dramatically different approaches to domestic, economic and foreign policy, voters will no doubt carefully follow the election. But don’t let the resulting strong emotions influence a decision of whether or not to invest in the stock market.
- Investors concerned about a particular party or candidate in the White House should closely examine the impact that parties and administrations have had on market returns historically. The bottom line is that the US economy and markets are resilient and perform well in spite of who is leading the country.
- Having a trusted advisor can help release emotions and avoid costly emotional decisions. Sticking to a financial plan and a long-term asset allocation model helps avoid emotional responses to political events and short-term uncertainty. It is best not to deviate from a well-thought-out plan and long-term investment strategy.
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IMPORTANT INFORMATION AND DISCLOSURES
The information provided here is for general informational purposes only and should not be considered an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. It should not be assumed that recommendations of AthenaInvest made herein or in the future will be profitable or will equal the past performance records of any AthenaInvest investment strategy or product. There can be no assurance that future recommendations will achieve comparable results. The author’s opinions may change, without notice, in reaction to shifting economic, market, business, and other conditions. AthenaInvest disclaims any responsibility to update such views. These views may not be relied upon as investment advice or as an indication of trading intent on behalf of AthenaInvest.
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