– Scott Reed
It’s an election year and emotions are high. Both sides of the aisle have stated emphatically that, pretty much, the end of the world is set in motion if their candidate doesn’t win. The least of the worries you will have would be the inevitable crashing of the stock market if their candidate doesn’t win since the end of the world would make all stocks pretty worthless anyway.
I miss objective news. Back in the day, and I can say that now that I have been in the investment business for 35 years, we used to get news and then get to decide how we felt about it. Now almost everyone wants to tell us how to feel as we are getting the news. That’s why I like academic studies so much. They just give you the facts.
The Capital Group, the parent of the American Funds mutual fund group, came out with a guide to investing in an election year. It relays trends over the past 22 election cycles and what we can glean from those facts. Now, I know that you want to tell me this time is different. The stakes are higher, the price we pay for getting it wrong will be greater, etc., etc., etc. But we have had a lot of crises in the past 22 election cycles, such as World War II, Vietnam, dropping a nuclear bomb, the entire Civil Rights Era, the Great Recession, etc.
The overriding takeaway is: The stock market doesn’t really care who is in office. There is virtually no difference in stock market returns based on Republican or Democratic presidents. U.S. stocks have continued to trend up under both. It is worthy to note that investors tend to go more to cash in the early part of an election year as candidates try to scare us into voting for them. After the primaries, the money starts coming back into the markets and the average 12 month U.S. stock market return following the primaries is a robust 10.2% in the past 22 election cycles.
As I have written over and over again, the short-term moves in the markets are based on emotion and the long-term moves are based on fundamentals. Moving the long-term direction of the markets is like turning a battleship and it takes time – years, not months. The markets care less about the current President and more about the system we live under.
Winston Churchill once said, “Democracy is the worst form of government, except for all the rest.” Elections are messy, frustrating and often scary. However, we know that there will be a peaceful transfer of power if the incumbent loses. We know that we will still live under a free enterprise system where opportunities are created by public demand and not government rule. We know that there will be winners and losers but the economic machine will continue on and that makes the collective market feel good.
One final note, if you are one of those that believes this is different and you feel you just need to go to cash until after the election, you are not alone. Many people have felt that way in past elections. And, you would have been right to do so in three of the past 22 election cycles. For me, I will continue to invest my money and place my vote with the 19 election cycles or 86% of the time when I would have come out ahead.
Be safe out there.
