Raise your hand if you’ve ever had this thought: “(Insert major political event here) happens on (date), and who knows what could happen afterward, so I’m just going to wait till it’s over before I get invested.” It is a normal, natural human emotion. In all walks of life, uncertainty discourages risk-taking. And it’s certainly doing so in this election year, when—in a twist—markets don’t seem to have a clear preference for one candidate over the other, and investors pretty equally fear both major parties’ nominees. Yet tempting as it might be to wait and see, history shows it isn’t necessarily a winning move. Stocks aren’t guaranteed to wobble around the election, and historically, most election-related moves have been fleeting. Staying out of stocks to avoid a blip that may or may not happen carries too great an opportunity cost, in our view.
Investors regularly overrate presidential elections’ immediate influence on market returns. Politics are an important market driver, but any material, fundamental negative reaction to a new administration usually happens in the inaugural year, and slowly, giving investors ample time to assess the landscape and make thoughtful changes, if need be, after the election. It is true, as many note, that inaugural years have historically had the highest frequency of down years of presidents’ four-year terms, but returns are still up more often than down. Moreover, no election in post-war history has directly caused a bear market. Some have occurred during bear markets, and some have been followed by mildly negative years. But there have been plenty of fine times under both parties.
If you’re waiting to invest, your primary concern is probably market volatility before and immediately after the election—the potential jitters and sudden shock. To that, we’d point out two things. One, short-term volatility is irrational, unpredictable and follows no set pattern. Two, returns surrounding elections are often fine, and any volatility is usually short-lived.
The charts at the end of this article show returns surrounding every election since 1948, from October 1 in the election year to October 1 in the inaugural year. As you’ll see, most returns are a-ok. Stocks seesawed during the month before Ike’s first election, but they were rising by October 22 and kept climbing after Election Day. A brief correction followed Ike’s re-election, but trying to skirt that would have been an exercise in uncertainty and frustration: Stocks peaked on Election Day, rebounded on November 29 and were almost back at breakeven on December 7, when the correction resurged. But even then, the decline was just 11% peak-to-trough, stocks bounced by mid-February—and were back in the black by June, a classic V-shaped move.
Returns around JFK’s victory over Nixon were similar: volatility through mid-October preceded gains until just after Election Day—then a brief flat period, followed by a monstrous rally beginning in early December. When LBJ won re-election in 1964, stocks were choppy but flat before and just after Election Day. Volatility—up and down—increased in mid-November, but a rally was underway by mid-December. Staying invested through the ups and downs was the most fruitful move, but put yourself in the shoes of someone waiting for clarity then. You’d probably have felt comfy buying on November 20, after a lovely rally—and just in time for a sharp drop. Would you have had the nerve to hang on, or would you have decided the Great Society was anything but and bowed out in early December?
Nixon has the dubious distinction of having bear markets begin shortly after both his elections, but even then, stocks rallied for a while after Election Day—both times—before the carnage began. There, too, waiting for post-election gains to confirm your decision would have caused you to buy in at a suboptimal time, while being invested through the campaign would have let you capture more bull market, then make an educated decision as the bear market began. Same song, third verse for Reagan’s first election. Reagan’s re-election echoed Ike’s, albeit on a much smaller scale, with no correction. Stocks swooned a bit just before and after George H-Dubya Bush won in 1988, but they were rising by November 16 and in the black two months later. Returns surrounding both Clinton wins recalled stocks’ Kennedy party. Ditto for W’s re-election, while Obama’s re-election returns looked awfully similar to Bush-the-first (despite his victory’s ensuring we’d careen off the much-ballyhooed Fiscal Cliff).
On three occasions, returns around the election were decidedly not good—Truman in 1948, Bush-the-second in 2000 and Obama in 2008. But each time, stocks were already in a bear market and only 1948’s bear was influenced by political drivers. In the late 1940s, stocks were dealing with the surprise extension of wartime measures including price controls and some inadvisable monetary tightening as the Fed and Treasury still pegged interest rates. The bear market began in May 1946—over two years before Truman’s re-election—and ended in June 1949. Anyway, it seems to us the post-Election Day ~-11% selloff then was mostly due to the fact no one thought Truman would win, and his campaign was broadly seen as quite anti-business.[i] His victory is one of US electoral history’s biggest surprises.[ii] But again, it didn’t change market direction, as the vote came amid a two-plus-year-old bear. George W. Bush had the misfortune of winning a contested election nearly eight months after the Tech Bubble burst. That bear market began in March 2000 and didn’t end until October 2002. And Obama’s victory came in November 2008—over a year into the bear market that accompanied the Global Financial Crisis, and just weeks after Lehman and AIG.
And then there was Carter. Stocks rallied the week before he won, peaked on the election’s eve, plunged for eight calendar days, then soared through year-end—but swooned in 1977. It’s probably fair to say politics had some influence on 1977 returns. Stocks hate active legislatures, and the election gave one party control of the White House and Congress, with a supermajority in the Senate. This paved the way for an active legislative agenda in Washington (The Department of Energy was created in 1977, for instance), which increased risk aversion—a fairly normal market response. But even then, it isn’t like “waiting for the election” would have really helped. Doing so would have caused you to miss a perfectly fine late-1976. And while stocks were down in 1977, it wasn’t a bear market, and the alternatives weren’t exactly enviable. Bond prices fell as interest rates rose, and high inflation took a big bite out of cash.
People always overrate political events. We saw it with the so-called fiscal cliff, sequester, government shutdown and Brexit. Now, we see it with this election. Some say that because polls heavily favor Clinton, a Trump win isn’t priced and thus could be “another Brexit.” Maybe so! But even then, Brexit triggered a two-day drop. Stocks were back in the black within 14 trading sessions. Maybe we get a Clinton wobble, or a Trump wobble—or maybe no wobble. It isn’t predictable. Maybe you see parallels between a Trump victory and Truman’s shock win, but notwithstanding the events of the last five days, America is not broadly dismissing the possibility of a Trump win next month. Polls heavily favor Clinton, but most of the press is not having a “Dewey Wins!” moment. After Brexit, many commentators are preaching “wait and see.”
So we suggest thinking long term and remembering that, whatever your opinion of either candidate and the eventual winner, presidents have limited power. Furthermore, if you’re invested globally, the US economy—about 25% of the world—has less impact on your portfolio than it would on an all-US strategy. Markets move on the gap between expectations and reality—in other words, surprise. Given how much investors fear both a Clinton and Trump presidency, and considering limited presidential power and the likelihood DC remains gridlocked whichever candidate wins, the odds favor positive political surprise in 2017 when the eventual winner doesn’t do all the bad things people fear. When people fear bad, and less bad happens, that’s bullish.
Exhibit 1: Election of 1948—Truman vs. Dewey
Source: Global Financial Data, Inc., as of 10/10/2016. S&P 500 price index, 10/1/1948 – 9/30/1949.
Exhibit 2: Election of 1952—Eisenhower vs. Stevenson
Source: Global Financial Data, Inc., as of 10/10/2016. S&P 500 price index, 10/1/1952 – 9/30/1953.
Exhibit 3: Election of 1956—Eisenhower vs. Stevenson
Source: Global Financial Data, Inc., as of 10/10/2016. S&P 500 price index, 10/1/1956 – 9/30/1957.
Exhibit 4: Election of 1960—Kennedy vs. Nixon
Source: Global Financial Data, Inc., as of 10/10/2016. S&P 500 price index, 10/1/1960 – 9/29/1961.
Exhibit 5: Election of 1964—Johnson vs. Goldwater
Source: Global Financial Data, Inc., as of 10/10/2016. S&P 500 price index, 10/1/1964 – 9/30/1965.
Exhibit 6: Election of 1968—Nixon vs. Humphrey
Source: Global Financial Data, Inc., as of 10/10/2016. S&P 500 price index, 10/1/1968 – 9/30/1969.
Exhibit 7: Election of 1972—Nixon vs. McGovern
Source: Global Financial Data, Inc., as of 10/10/2016. S&P 500 price index, 10/1/1972 – 9/28/1973.
Exhibit 8: Election of 1976—Carter vs. Ford
Source: Global Financial Data, Inc., as of 10/10/2016. S&P 500 price index, 10/1/1976 – 9/30/1977.
Exhibit 9: Election of 1980—Reagan vs. Carter
Source: Global Financial Data, Inc., as of 10/10/2016. S&P 500 price index, 10/1/1980 – 9/30/1981.
Exhibit 10: Election of 1984—Reagan vs. Mondale
Source: Global Financial Data, Inc., as of 10/10/2016. S&P 500 price index, 10/1/1984 – 9/30/1985.
Exhibit 11: Election of 1988—Bush vs. Dukakis
Source: Global Financial Data, Inc., as of 10/10/2016. S&P 500 price index, 10/1/1988 – 9/29/1989.
Exhibit 12: Election of 1992—Clinton vs. Bush
Source: Global Financial Data, Inc., as of 10/10/2016. S&P 500 price index, 10/1/1992 – 9/30/1993.
Exhibit 13: Election of 1996—Clinton vs. Dole
Source: Global Financial Data, Inc., as of 10/10/2016. S&P 500 price index, 10/1/1996 – 9/30/1997.
Exhibit 14: Election of 2000—Bush vs. Gore
Source: Global Financial Data, Inc., as of 10/10/2016. S&P 500 price index, 10/1/2000 – 9/28/2001.
Exhibit 15: Election of 2004—Bush vs. Kerry
Source: Global Financial Data, Inc., as of 10/10/2016. S&P 500 price index, 10/1/2004 – 9/30/2005.
Exhibit 16: Election of 2008—Obama vs. McCain
Source: Global Financial Data, Inc., as of 10/10/2016. S&P 500 price index, 10/1/2008 – 9/30/2009.
Exhibit 17: Election of 2012: Obama vs. Romney
Source: Global Financial Data, Inc., as of 10/10/2016. S&P 500 price index, 10/1/2012 – 9/30/2013.
[i] Source: Global Financial Data, Inc., as of 10/11/2016.
[ii] Truman trailed in virtually every poll and had extremely low approval ratings. He was thought virtually certain to lose as the Democratic Party was fragmented by support for the Progressive Party and States’ Rights Party. All this is what brought about the famously wrong Chicago Tribune headline claiming Thomas E. Dewey the victor on election night.