How Will the Market Behave in an Election Year?
The
2016 general election is now in full swing. Donald Trump and Hillary Clinton
are fighting as November 8th nears and our nation’s future is decided. Emotions
are running high, and the results of this election will have far-reaching
consequences, from healthcare to immigration. Those who have money invested in
the stock market are particularly nervous, as the unparalleled nature of this
year’s election leaves them wondering what is in store for the markets.
Historical Election Year Market Trends[1]
It
is impossible to predict the future, but the past can often provide us with
some clues as to what the future may hold. Looking back at history, it is
fascinating to see how closely related market cycles and presidential terms
are. For the 60 years from April 1942 to October 2002, there were 15 stock
market cycles, each lasting about four years, the same length as a presidential
term.
When
we look a little deeper, we see that bear markets historically occur during the
first and second years of presidential terms, while bull markets occur during
the third and fourth years. Election years are the fourth of the presidential
term. In fact, a bear market, defined as a decline in the S&P 500 Index of
20% or more over a period of 1-3 years, never occurred during an election year
from 1942-2002.
What Causes The Cycles?
Why
is there such a direct correlation between political and economic cycles? The
simple answer is fiscal policy. The Federal Reserve has received a lot of
attention as of late for their ability to impact the economy through setting
interest rates and controlling the money supply. The executive branch of the
government also has their own means of influencing the economy, mainly through
taxation and spending.
It
doesn’t come as any surprise that politicians have discovered a correlation
between the health of the economy and voter satisfaction. Consequently, as an
election approaches, the sitting president usually does what he can to improve
the economy to keep his party in power through the next election. This exercise
of fiscal policy to strengthen the economy leading up to an election
contributes to election year bull markets.
However,
once the election is over, the new president gets down to business and economic
appearances are set aside. All of the hype and optimism surrounding a
candidate’s promises also fade away as they get into office and the realities
of governing set in. This is why the first two years of a presidential term
have traditionally seen a more volatile market environment. Then, as the
presidential term wanes, fiscal policy picks up, carrying the markets up into
the next election. And so the four-year cycle continues, keeping stride with
the presidential election cycle.
What To Expect This Year
I’ll
be the first to admit that this has not been a run-of-the-mill election. This
year’s political race has been anything but ordinary, to say the least. Some
people are blowing things so far out of proportion as to predict complete
economic collapse depending on which candidate enters the white house. But is
it really that big of a deal?
Looking
back to 1900, the data shows that, at least where your portfolio is concerned,
it doesn’t make much of a difference which party wins the election.[2]
However, when the end of a second term necessitates the election of a
completely new president, the markets can be affected and often do not perform
as well as in other elections.[3]
If
history is any guide, we should expect moderately positive market returns this
year. So far this year the markets have
upheld this pattern. However,
probability suggests the potential for more volatile behavior once the new
president takes office and their economic policies are known. Because of the
unprecedented and often unpredictable nature of the 2016 race, investors should
be prepared for short-term volatility as well.
What You Should Do
Whether
it is an election year or not, investment strategies should be focused on your
long-term investment goals. These will vary due to the unique risk and return
criteria of each client. No two
investors are the same. Because of the
innate volatility of the stock market in general, I believe that short-term investing
should be considered strictly as a tactical portion of an investment portfolio
and should be only a modest part of a portfolio if used at all. The fact that
we are having an unusual election this year should not make a material
difference in a sound overall investment strategy built for the long-term. If
you keep your eyes on the horizon then this year’s election will likely be no
more than just a small bump in the road, if history repeats.
If you’re not sure that your
investment strategy is reliable in choppy markets, it is important to get a
second opinion from an experienced professional. Also, if the high emotions and
sensational media coverage of the 2016 election are getting to you, talking
through things with an advisor can help calm your fears and keep you from
making irrational investment decisions. If you have
any questions or want to discuss, please contact us at 708.488.0115 or
by email at lumencapital@hotmail.com.
Christopher R. English is a money
manager and the founder of Lumen Capital Management, LLC, a Registered
Investment Advisory firm. Specializing in investment management and developing
customized portfolios that reflect a client’s values and needs, he has nearly
three decades of experience working with individuals, families, businesses, and
foundations. Based in the greater Chicago area, he serves clients throughout
Illinois, as well as Florida, Massachusetts, California, Indiana, and other
states. To schedule a complimentary portfolio review, contact Chris today by
calling 708.488.0115 or emailing lumencapital@hotmail.com.
[2]
http://www.kiplinger.com/article/investing/T043-C008-S003-how-presidential-elections-affect-the-stock-market.html#ECpfayA6M0iQEehv.99
http://www.marketwatch.com/story/2016-predictions-what-presidential-election-years-mean-for-stocks-2015-12-29
posted by CR English at 6:30 AM
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