01 Oct 2020 Election Day Jitters
‘Tis the season for political ads, campaign yard signs and presidential debates. I knew the 2020 presidential election was nearing but for some reason, probably Tuesday’s debate, I just realized how close it actually is. As of the posting of this brief, Election Day is just 31 days, 17 hours and 30 minutes away.
Presidential elections always come with some sense of uncertainty and even anxiety but this year those feelings seem to be more salient than ever. I know that many of you are feeling anxious about the upcoming election and how its results could impact the U.S. stock market and your portfolio. It’s perfectly normal to be concerned but the question is, what, if anything, should you do about it?
I don’t think it will surprise you to find that the answer is probably nothing. This assumes that you’ve done the work ahead of time to properly diversify your portfolio and ensure that you’re taking only the amount of risk necessary to accomplish your financial goals and not more than you can handle. And while I believe sticking with your plan the best course of action for the majority of long-term investors, I understand that it can
sometimes often be easier said than done. With that in mind, I thought it might encourage you if I shared some of the research behind the longstanding wisdom of sitting tight.
We can expect an increase in volatility, right?
A recent Vanguard study found that equity volatility has been modestly lower in the weeks leading up to and following a presidential election than over a full market period. 13.8% standard deviation during the 100 days prior to and after an elections vs. 15.7% for the entire time period of the study. I have to admit that I was surprised by this. I would have thought the opposite. It doesn’t mean that this election period won’t be different but at least we have history on our side.
The markets have performed equally well under both parties.
Here’s an interesting look at the investment returns of a 60% stock and 40% bond portfolio since 1860. As you can see, there have been bull markets and bear markets under the watch of both the Republican and Democrat party. And the average annual compound return has been amazingly similar.
Monetary policy matters more than who is in office.
There’s an old investing adage that says, “don’t fight the fed.” It basically means that you shouldn’t sell stock during times of accommodative monetary policy from the Federal Reserve. Presidents Reagan and Clinton both benefited from falling interest rates during their terms while George H.W. Bush and George W. Bush were hurt by Fed tightening. Of course, there were other factors involved but generally speaking monetary policy has an outsized impact on the economy and stock markets. Perhaps more so than who is in the oval office. The Fed recently indicated that it plans to maintain low interest rates through at least 2023, which could provide support for stocks.
Our predictions are often wrong.
The night of the 2016 election, as a Trump victory looked increasingly likely, stock market futures fell more than 5% in premarket trading – an indication of what investors expected to happen when the stock market opened the next day. Interestingly, the S&P 500 closed up over 1% the day after the election. This is not a political statement, it simply shows that it’s impossible, even when we feel certain of the outcome, to predict what will happen in the stock market.
The impact of legislation isn’t always as expected.
On a similar note, our predictions about what impact legislation will have are often much different than the actual results. This is probably due to many factors including the law of unintended consequences, the complexity of the economy, the impact of outside events and the fact that we humans are pretty terrible at predicting the future.
You’re better off staying fully invested.
The below chart shows the growth of $10,000 invested in the Dow Jones Industrial Average since 1896. The portfolio indicated by the grey line stayed fully invested regardless of who was in office. The portfolios indicated by the blue and red lines only stayed fully invested when a Republican or Democrat was in office. This brings to mind another adage, “it’s time in the market, not timing the market.” I won’t even mention the tax consequences of getting in and out of one of the blue or red portfolios.
You have to be right twice.
Even if we could somehow know in advance who is going win the upcoming election AND how the stock market would react, we’d be left with the problem of needing to be right twice. Sure, we might successfully sidestep any adverse market declines by selling some or all of our stock holdings but we’d be faced with the question of when to get back in. Some of the most difficult conversations I’ve had over the past several years have been with people (none of whom were clients) that switched to an ultra conservative portfolio during the ’08 financial crisis or before the last election. Their plan was to go back to their ideal portfolio after things “settled down”, but years later they remained under-invested after a multi-year bull market. The second decision in the market timing equation is very often harder than the first.
I’ve stopped using the word “interesting” to describe the future because I’m not sure it does justice to how the next several months may play out. We’re sure to be in for a wild ride and there are certainly things to be concerned about. Even so, I believe that the most prudent course of action when it comes to your well-diversified, carefully constructed portfolio is to stay put. There will surely be days this November when we question our logic but, given the alternatives, it’s important that we adhere to it. I’ll close with a quote that Sam repeats often around the office. Perhaps it will help in the coming months:
“The danger of focusing on the stock market as a singular entity is to lose sight of the fact that it actually represents thousands of companies run by many more thousands of smart people busily innovating, creating, and producing goods and services they sell to generate profits. Whatever the circumstances, whether pandemic, elections, recessions, or hurricanes, they simply find new ways to profit – they figure it out. Your money is not invested in a faceless, breathless stock market ticking away endlessly, rather you are invested in the creative, productive energy of people and companies all over the world.”
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