“If you fell down yesterday, stand up today.” ~ H.G. Wells
Question: Historically, what happens to financial market performance after a presidential election?
Answer: Because this column is written a week or so ahead of publication, the timing of this question is perfect since at the moment, we do not know the outcome of the election.
According to the Federal Reserve Bank of St. Louis (FRED) and the U.S. Bureau of Labor Statistics (BLS), since 1934, the inflation–adjusted return (assuming reinvestment of all dividends) was approximately 7.03% for the S&P 500 Index. Since that time, over the long-term, meaning any period of 10 years plus, market returns rely more on the strength and resilience of the American economy than on which party occupies the White House.
The politicians and the media can have a tendency to exaggerate or overstate the likely economic implications of which party occupies the White House. This year in particular, we are also focused on COVID-19 policies, response and the future path of the virus in addition to economic policies.
During political campaigns, the country’s challenges are typically highlighted. This negative focus and differing opinions may discourage some individuals from investing and could place additional pressure on markets. Talk of a politician’s economic platform can increase market volatility. History suggests that the inclusion of additional factors, such as labor markets, demographics, productivity, inflation, trade models and tax policies influence the fundamentals of economic growth. Although the presidential candidates are indeed very different regarding their policies, economic growth can be measured.
Gross Domestic Product (GDP) is a standardized measurement of the monetary value of all the finished goods and services produced within a country’s borders in a specific time period. What happens in 2021 depends on more than who wins the White House, although the President traditionally receives the credit or blame. GDP is apolitical; and has averaged 3% per year since 1948, again according to the BLS. As we know, the real GDP fell 5% on an annualized basis in the first quarter of this year, and decreased a record 32.9% in the second quarter because of the COVID-19 crisis (BLS reports).
No matter what the outcome of the 2020 elections, we will have a President and two Chambers of Congress to represent us in Washington D.C. In addition, the Federal Reserve Board and Fed Chairman Powell influence economic policy with fiscal support, monetary supply and interest rates which are expected to remain flow–through 2023.
In 17 of the past 23 election years, the S&P 500 has ended in positive territory. Examples of years when the index did not end in the green there were outside influences such as the dot-com bubble and the 2008 financial crisis. Over the past 75 years, through Democratic and Republican administrations, the S&P 500 index has averaged over 10% (BLS).
Volatility is a reality, especially with the unique twists and turns of 2020. The fallout of COVID-19, trade negotiations, geopolitical tensions, and social unrest influence the current environment.
The bottom line is that market volatility remains no matter which political party wins. Growth is anticipated over the long-term based on historical data, increased productivity and innovation. If headlines and fluctuations have you nervous or worried about your financial plan, consider connecting with your Certified Financial Planner Professional to stress test your plan and run simulations on how your plan may perform under different market and economic conditions, no matter which political party is in power. Stay focused and plan accordingly.
The S&P 500 is an unmanaged index of 500 widely held stocks. It is not possible to invest directly in an index. The market performance noted does not include fees and charges which would affect an investor’s returns. Past performance may not be indicative of future results. There is no assurance the trends mentioned will continue or that the forecasts discussed will be realized. Past performance may not be indicative of future results. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. The opinions expressed are those of the writer as of October 28, 2020, but not necessarily those of Raymond James and Associates, and subject to change at any time. All information provided herein is for informational purposes only and is not intended to be, and should not be interpreted as, an offer, solicitation, or recommendation to buy or sell or otherwise invest in any of the securities/sectors/countries that may be mentioned. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation.
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