The following is a guest post from Dr Glenn Freed and Dr Andrew Berkman.
‘Tis the Season to Vote
With both parties’ conventions recently behind us, many investors have now turned their attention to the impact that new presidential policy might have on the overall stock market. The press has been questioning how the outcome of the election will impact the business environment and the economy. All of a sudden, uncertainty around the election results has become an important driver of investment decisions.
However, we think a little historical perspective on stock market returns might help reduce this anxiety.
Some common themes one reads and hears about in the media concern which party is good for business or which party is good for the common person. Issues relating to taxes and budgets receive much attention, as they should. The United States is a democracy, and voters should make an informed choice. But there are clearly two sides to this debate, and the choice a voter makes is a political one. Advisors and their clients should be able to have thoughtful investment discussions without getting into the political fray. Each party is supported by well-known investors, and both advisors and their clients may have diverse political views. An important outcome of an investment discussion is to reduce the anxiety around what happens to the stock market after the election.
Presidential Election Cycles and Stock Returns
To provide some historical perspective, we compiled the total return of the S&P 500 beginning from the 1952 presidential election through July 2012. The chart below uses calendar years, starting in January after an election. Some advocate starting this analysis in the month of November since election results are now known and the market has theoretically accounted for the results in stock prices. Others prefer starting the analysis in February to reflect when the president officially takes office. Suffice it to say, all these variations yield qualitatively similar results.
Let’s break the presidential election cycle into four years and also calculate the annualized return for the entire presidential election cycle—presidents may change during a four-year term, but the party in control will not.
As you can see in the historical data, the S&P 500 seems to have done noticeably better when Democrats controlled the presidency than when Republicans did. Some have sliced the data further, examining returns based on who controls Congress as well. The permutations become many and with a much smaller history in each variation. The point is that Republican administrations—contrary to popular belief—do not necessarily produce better stock market returns than Democratic administrations.
This data should not be used to predict stock returns based on the party that wins the election. Rather, it should be used as a historical perspective of stock returns during various presidencies going back almost 60 years.
As the data shows, stocks have done well regardless of which party is in control of the White House. Additionally, the stock market is driven by many factors beyond the control of the president. For example, currently, concerns about events in Europe and slowing growth in China are seen as negatively impacting markets, but the U.S. has little direct influence.
Proactive Planning for Potential Policy Changes
There are opportunities for meaningful discussion concerning the upcoming political events. Different candidates have differing plans for issues such as taxes, Social Security and medical care that can affect investors’ financial situations. Investors together with their advisors should proactively prepare to respond to potential and actual policy changes and the impact on their wealth, whichever way the election is decided. Our next article will provide greater detail on one key issue for consideration, tax planning.