Prepping for a tranquil election season

So far, 2020 has been mostly serene, and I expect nothing to change as the election approaches.

I kid, of course.

We’re 82 days away from the election, and somehow, everything is political. Infectious diseases. School openings. Football. Everything.

Some of our clients have been asking about our thoughts on the impact that the election might have on markets, so I wanted to take some time to share some evidence that can guide us toward a reasonable conclusion. The conclusion is: History has shown us that the market has little correlation with the party in power in the White House.

A couple of years ago I wrote a post, part of which discussed the fallacy of pretending to have any idea what elections mean for markets. I thought I’d revisit this with some more data.

First, the market seems to be pretty indifferent as to which party is in office, which might be a surprise to D’s and R’s, but in different ways:

Second, returns during election years have historically been a bit lower than returns immediately after election years, although it’s relatively close, and this isn’t a ton of data as elections don’t happen all of that frequently:

Third, the best investment advice remains: Invest and stay that way. No matter your perspective, those who remained fully invested outperformed their hypothetical, more selective (partisan?) counterparts dramatically over time:

Also, depending on your perspective the Republican underperformance is either (largely) due to President G.W. Bush (the S&P 500 returned -40% during his years in office!) or due to things out of his control during his tenure (9/11, .com bubble bursting, housing bubble bursting).

The most important lesson we can learn is that, while it’s tempting to predict future market returns based on who’s in the Oval Office, the evidence shows us that our best bet is to determine an appropriate allocation between stocks, bonds, and cash, and stick to it no matter who’s in charge of the Executive Branch.

This chart does a good job of teasing out the risk of being a bad market timer. And, while you’d have to be a really terrible market timer to miss only the 25 best market days, even missing one had a dramatic negative impact on wealth creation.

So, even if we’re not expecting a tranquil election season, wise investors take advantage of whatever volatility might present itself in order to purchase more assets expected to grow over the long-term.

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