As the recent Democratic and Republican political conventions are in the rear view mirror, the presidential election season will now move into high gear! The “hype” on everyone’s minds right now is, of course, whether Donald or Hillary should win the election, and that cannot be ignored. If this post was an actual debate and I were behind the podium, the question you might ask is: How will this election affect the markets?
In previous communications, I have consistently emphasized the importance of maintaining a long-term perspective. Investors must keep their emotions in check and strive to block out the hype – the noise that can distract any of us from moving toward the attainment of your long-term financial goals.
The elections can sometimes bring out the more emotional side of our personalities, especially during a presidential election year which can cause excitement or despair, depending on your side of the aisle. I have even heard people complain that if a certain candidate wins, “The markets are doomed and so are my investments!”
Although every citizen is certainly entitled to their political beliefs, I think it might likely be very unwise to allow your political passions to drive your investment choices. It’s not about election years, or even political parties – but about investing for the long run. Nonetheless, there are some historical election year patterns that may be worth watching. Here are a few to consider, according to the 2016 Mid Year Outlook recently published by the investment research department at LPL Financial:
The Economic Factor: Income Growth
Income growth is one way to gauge the impact of the economy on election results, as this measure captures the impact of several key factors, including the unemployment rate, inflation, and wage growth. In the year leading up to the election, inflation adjusted, after-tax income growth of about 3% to 4% appears to be the threshold for the incumbent party to win. As of June 30th, this measure is currently growing in the 3% to 3.5% range, suggesting that the incumbent Democratic Party has a good chance of winning just over 50% of the two-party vote in November’s election.
Stock Market Performance Under Different Parties
The often spoken market mantra that “gridlock is good” suggests that a split Congress, or a President from the party opposite the one in control of both houses of Congress, would be better for markets. The downside, however, is that gridlock could limit policy action at a time when many policy experts think changes are needed on several fronts including taxes, entitlement reform, immigration, security, and others.
Historically, the combination of a Democratic President and split Congress has been best for markets, though it has occurred infrequently, with an average gain of 10.4% for the Dow Jones Industrial Average. A Republican sweep of the White House and Congress, on the other hand, has also been positive for stocks as well, with an average gain for the Dow of 7%. Election years have been strong for stocks, excluding the anomaly in 2008, the worst year of the Great Recession. Election year gains have averaged close to 10% and positive returns have occurred in a solid 87% of election years.
The election year pattern for stocks suggests volatility may persist through the summer months until markets have more clarity on the candidates and their platforms. Once that clarity arrives, often before the election itself, stocks have typically staged a late-year rally. The path of bond yields during a presidential election year is very similar to the historical pattern for any given year.
The seasonal tendency is for yields to decline starting in late October through November; but during election years, the tendency has been for an increase in Treasury yields. Taking these historical patterns into consideration, and given the current environment, suggests that we will remain in a similar policy and stock environment as we’ve seen in recent years.
A Winning Platform
The road to long-term financial goals is filled with many potholes and road blocks. But the best election year “trade” might be to stick to your long-term investment strategy and remain focused on your investment aspirations. Over these past seven years, one of the best, but also most befuddling, bull markets in history may have made us feel like the financial markets are not functioning properly, and there’s a need to change something to “make investing great again.”
But even though a changing world presents important new challenges, staying focused on a good plan, and remaining patient may bring out the ways that “investing has always been great.” I think you have the winning platform already: invest early and often, stay diversified, and be patient through the ups and downs.
As always, if you have any questions, please email me at firstname.lastname@example.org or call me at (925) 464-7057.