Broker Check

Investing in an Election Year

January 25, 2024

The biggest question I’m hearing from clients is what to do with their investments considering we are in an election year.  Let’s be honest, this is not just any old election year.  The probable candidates are old, but the fervor surrounding them is not normal.  I want to be extremely clear before we move on here, I am not giving any opinions on either party or candidate or potential candidates.  These are simply facts as it relates to the markets during election cycles.  So here we go:

  1. What’s the biggest adjustment you can make during an election cycle? Stick with your plan.  The S&P 500 has returned on average of 11.3% during the 12 months following the primaries.   Conversely, the return has been 5.8% in non-election cycles.  There have only been 2 years when the market was negative during an election year.  2000, which was driven by the tech bubble and 2008 which was driven by the housing crisis.  Neither had to do with politics.  Having said that, you can typically expect volatility during the primary season.  Markets don’t like uncertainty, so if something starts trending in an unexpected direction, we may be in for a bit of a roller coaster.  To me, that’s even more of a reason to set up an auto contribution to your investment accounts.  Don’t try to time the market, don’t think you know exactly what is going to happen.  Stay consistent and stick to your plan.
  2. The biggest mistake investors tend to make is avoiding the market altogether. Whether it be moving investments to cash, or leaving cash on the sidelines, that strategy probably won’t work out for you over the long term.  If you are still 10 plus years away from retirement, do not move to cash in your retirement accounts.  If you want to explore less volatile options don’t hesitate to call me to review, but the fact that you are contributing with each paycheck is more important and will allow you to buy into the volatility we may be looking at. Don’t believe me?  Take a look at this chart below:

  1. Lastly, does the market do better under Republicans or Democrats? The answer is is typically doesn’t matter.  The market is swayed much more by potential economic downturns than political party.  On the surface, it looks like a Republican victory (15.8% S&P return) has historically been better than a Democratic victory (8.1%) [1], however, recessions have played a large role in those returns.  Democrats have been elected 4 times in a recession year compared to only twice for a Republican.  If you strip those years out, there is still a slight edge to Republicans (16% to 14.7%) but not as significant.

The bottom line is election cycles can bring a lot of nerves and nail biting.  Obviously, this particular election is already eliciting emotions stronger than anything I have been alive for.  Primary season may test you, but stick with your financial plan.  Everyone’s plan is different, so if you have a specific question please reach out.  There are various strategies to implement on an individual basis.  However, sticking with the plan and your fundamentals tend to be more positive than not. 

Please feel free to share this with anyone who might benefit. 

Rob

[1] Forbes: Investing During an Election Year