Watching the US election can feel like a horror movie, full of scares and heart-in-mouth moments. Yet despite all the petty slogans, bitter rhetoric and big economic promises, it’s easy to overestimate the impact an election – or US president – has on portfolios.
There is no doubt, however, that the current campaign is anxiety inducing for investors. Canada may be gearing up for its own divisive political battle, but its noisy neighbour is a behemoth that dominates news cycles. And just like a good horror film, these stories are full of jumps and nerve-shredding moments. It’s only human, therefore, to get caught up in these feelings.
The assassination attempt on Donald Trump, the Joe Biden debate disaster, and the dramatic impact of his replacement, Kamala Harris, have bred uncertainty. An election by its nature is unpredictable, of course, but history tells us the equity market’s behaviour during election year often follows a pattern.
Whichever party wins, the first half of the year tends to feature muted returns followed by stronger returns later in the second half, once the outcome is known. As of August 27, the S&P 500 is up more than 19% and another bull run is well under way but that more likely reflects a growing confidence that the US Federal Reserve will cut rates, rather than excitement at Harris or Trump moving into the White House.
Despite the drama and plot twists over the years, since 1928 US equities have posted positive presidential election-year returns more than 83.3% of the time, with an average return of 11.4%1. Once the victor has been established (and especially if the Fed does cut as expected), some analysts expect things to get even better. Since 1948, stocks posted higher returns in the period after election day 63% of the time2.
To counter anxiety, it’s worth noting that while you may have a political preference, markets don’t play favourites, and history shows it doesn’t perform better under any one party. Stocks have performed well under both blue and red regimes – the best returns, incidentally, occurred under the F. Roosevelt, Clinton, Eisenhower and Reagan administrations.
Since 1930, the average annualized price return (excluding dividends) of the S&P 500 was 9.6% when a Democrat won and 5.7% when a Republican won. But over a longer period, results for both parties are similar, with the S&P 500 returning around 7%.3 Under Trump and Biden, despite appearing worlds apart on policy, the S&P 500 returned 14% per year under each president.
Despite these facts, it’s understandable that the turmoil of election years increases the risk of unnerved investors changing their portfolio based on perceived strengths of the candidates and/or who they think will win. Taken alone, emotional investing and trying to time the market are poor strategies. Together they can be lethal for your investments, especially when the hyped political rhetoric doesn’t match reality.
Of course, the two candidates’ efforts to effect change are not futile – and there are sectors worth considering. Trump, during his time in the White House, reduced the corporate tax rate from 35% to 21%, supported fossil fuel industries over green energy, and displayed a light touch when it came to regulation. Harris, on the other hand, is reaching out to the middle class, wants to reduce consumer pricing, would increase corporate taxes, continue the Biden administration’s focus on climate change, and likely tighten regulation.
The energy debate, in particular, offers a cautionary tale about shaping your investments based on these differences. Under Trump, fossil fuel industries produced mixed performance, while under Biden, despite fears of increased regulation and diminishing returns, those sectors thrived.
Staking your investment choices on policy promises may be folly but that’s not to say investors should shrug off concerns about the impact of the election result on certain investments. A Q Wealth Portfolio Manager can talk you through any potential implications and help you understand what the drivers of these sectors might be.
The bottom line is that market performance, as shown by the numbers, is affected less by elections and more by economic fundamentals. A gridlocked political system in the US, where different parties control the Senate and the House, would cement that. The rhetoric and direction of the US Federal Reserve and the Bank of Canada, for example, are more significant for investors.
Long-term retirement goals require long-term planning, not knee-jerk reactions to election campaigns or results. A Q Wealth Portfolio Manager can help you build the right plan for you and help you stay the course amid the election noise. This horror movie is reaching its third act – don’t let emotion interfere with your investments.
1 Source: Global Financial Data, as of 02/01/2024. The S&P 500 Total Return Index is based upon GFD calculations of total returns before 1971. These are estimates by GFD to calculate the values of the S&P Composite before 1971 and are not official values.
3 Source: Morningstar Direct, Edward Jones
