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Elections and the Markets - It Depends
As many of you have noticed in recent weeks, there has been an increase in election and campaign advertising. It’s always a very trying time to determine the right course of action during an election, to choose the best candidate, particularly in an election that is being coined as “the most important” of our lifetime. That anxiety is further exacerbated by months of living in the new and unplanned COVID world, emergent social unrest, and a hyperbolic media.

It also has had many of our clients asking, “what does the election and its outcome mean for the markets and for the economy?” It may seem like an easy question to answer, but it never really is. Like many outside influences on the economy and on the markets, a question like “what does this election and its outcome mean for the markets and for the economy?” always needs to be qualified by: it depends.

It depends on whether one political party has control over the executive office and both houses of Congress, or it depends if Congress is split. It depends whether Congress is controlled by one party, but different from the Executive office. Again, it depends. 

But history would tell us that while there are some subtle differences, the long-term S&P 500 performance averages and economic growth averages tell us those differences are very slight, if not negligible.

In the attached chart from our friends at Hartford Funds, the data would suggest that in the last six presidential administrations dating back to 1980, economic GDP growth has ranged between 1.5% (from 2009-2017 in the two-term Obama administration) and 3.9% (from 1993-2001 during the two-term Clinton Administration). While this is a wide range, those growth rates were the extremes. More importantly, regardless of the administration in the White House, we always saw the economy averaging positive GDP growth, somewhere in the ballpark of 2.0–2.5%.

Similarly, the S&P 500 average annual returns have been double digit positive in all but one of the six administrations going back to 1980 – the exception was the George W. Bush administration from 2001-2009 that was caught between two bear markets and ended up with a negative 2.9% average during his eight-year term. 

Another chart goes back further looking at returns in the market under different party administrations since 1936. This chart comes from our partners at Capital Group (otherwise known as the parent company of American Funds). This shows that all but one administration has had a positive return over the course of the full administration. Similar to the previous chart that showed the best GDP growth and the worst GDP growth going back to 1980 was under an administration from the same political party (Democrat), in this chart we see that the best S&P returns and the worst returns came under an administration from the same political party (Republican). So try not to get hung up on which political party takes over the White House.

We understand clients’ concerns about volatility ahead of elections. Historically, the markets have seen volatility leading up to Presidential elections, but much of the volatility to the downside occurs, on average in the 6 to 12 months ahead of the election. However, in the 6 months leading up to the election, as well as the 12 months following the election when the volatility, on average, tends to be to the upside. 

In the chart below from our partners at Lord Abbett, you can see that while it depends on the government mix as to the magnitude of returns, they are only subtly different. But directionally, they are the same.

As a firm, we historically have not made changes ahead of, or because of elections. As for making changes to reduce risk ahead of elections, we have perused a lot of reports and research (beyond the charts we have shared in this piece) to suggest that elections and the resulting impacts on economies and markets aren’t consistent enough to warrant any changes in our trading or our portfolio management strategy. We don’t choose that approach to disregard our clients’ personal feelings about the elections or concerns about their potential impact on the markets, in the short term. Instead, we maintain our current strategy because we have not seen the evidence in the historical research to warrant making changes to well-constructed portfolios that are built for the long run. 

Our philosophy is to build portfolios by buying stocks/companies that we like for their solid business operations and for their defensibility within the industries that they compete. We philosophically try to stay relatively “neutral” to sector weightings versus the overall market (the S&P 500) and to stick to those weightings, within reason. If we are overweight or underweight sectors, it will be driven by risk and reward. In other words, we may be slightly overweight sectors that pay us for the risk we take, and we will be slightly underweight sectors where we aren’t being compensated for the risk, or the volatility, associated with it. 

In conclusion, this election season is a trying period. Take the time to make the decision that best fits your philosophy about how you believe the country should be run. And make that vote.

But in the long run, the election outcome will likely not make a big impact on the markets or the economy. So be steady and remain patient with your intentionally designed asset allocation strategy and with your portfolios that have been built for the long run. 

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Advisory Services offered through Stiles Financial Services, Inc, a Registered Investment Adviser. Securities offered through LaSalle St. Securities, LLC a Registered Broker-Dealer, Member FINRA/SIPC. Stiles Financial Services, Inc. is not affiliated with LaSalle St. Securities, LLC. 

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