By John Grace
The U.S. presidential election is undoubtedly the most watched event in the world.
Before we get to the subject at hand, let me encourage you, dear reader to recognize unlike the other 23 presidential elections over the past 93 years, this really is the most important election in our history. This time is different. So please plan now to vote Nov. 3.
As you have seen this year, the stock market moves in mysterious ways. Since it’s an election year there are plenty of pundits looking to Wall Street for a read as to who will win the White House.
When the S&P 500 trends higher in the three months before the election, the incumbent party usually wins. When the same index moves lover, the challenger usually wins, according to LPL Financial. The S&P 500 has accurately determined the winner of the election 87% of the time since 1928 and 100% of elections since 1984.
U.S. stocks posted their largest monthly gains since April, and notched the best August since 1984, per CNBC. While the month of September hasn’t been the worst month of stock market trading every year, over the past 25 years, the average monthly return for September is approximately minus .04%, while the median monthly return is positive.
Given this year has been an unprecedented year in so many areas, it is advisable for investors to prepare in advance for a potentially serious meltdown. It’s interesting that some analysts consider the negative effect on markets worldwide is attributable to seasonal behavior bias as investors make portfolio changes in preparation for taking on new positions in the fall.
Let’s address two separate questions. First, how has the stock market performed during presidential election years compared to non-presidential election years. Second, how has the stock market reacted under the leadership of a Republican or a Democrat.
Bob French of Retirement Insights put it this way in July: “For the entirety of this analysis, we’ll be looking at the period from 1926 through 2019, and we’ll focus on the S&P 500 Index. During this period, we’ve had 23 presidential elections. To set our baseline, over this entire time period, the annual average return for the S&P 500 Index was 12.09%.
“During election years the S&P 500 only averaged a return of 11.28%, while during non-presidential election years, the annual average return was 12.35%. So, it would seem like presidential elections aren’t very good for the stock market — and this sort of makes sense. There’s uncertainty, which markets don’t tend to like very much, but that’s not the full story.”
Looking at whether or not the market treats Republicans or Democrats differently, French’s best answer is, “maybe.”
French continues, “From 1926 to 2019, we have had a Republican president for 46 years, and a Democratic president for 48 years. The difference in returns between the parties is pretty stark. The average annual return for the S&P 500 index when we had a Republican president was 9.12%. When we had a Democratic president, the S&P 500 average 14.94% per year. That’s a premium of a little more than 5.8% per year on average.”
American voters are notorious for giving too much credit as well as too much blame to every president, every time. It’s not as though any one person, no matter their belief, is simply that powerful. In fact, I would argue that reading the economic tea leaves has a lot more to do with watching the buying and selling behavior or ordinary consumers, mostly based on age.
The market seems to prefer gridlock. French continues: “If we reframe the question in terms of unified and divided government, we can see a more complicated story. Conveniently, over the period we’re looking at from 1926 to 2019, you had an equal number of years of unified government (where the same party is controlled the presidency and both houses of Congress) and divided government. During periods of divided government, the S&P 500 averaged 9.66% per year, but during periods of unified government, the annual average return was 14.52% for the S&P 500. That’s a premium of almost 5% per year when one party has run the table — that’s huge.”
I will always remember election night 2016. As the polling results tumbled in, 200 of my peers and I were at a conference in San Francisco focused on the futures market that showed Nov. 9 would open 1,000 points in the negative. That’s a big deal.
But when the market opened it was off to the races as every metric turned positive. So, just as you don’t wait for every light to turn green before you leave home, don’t wait for absolute certainty to begin planning your financial success.
Take the time to put your financial plan together so you can see what it takes to make work optional in your desired time frame and the equivalent income you need to live for the next 20 to 30 years. And please vote Nov. 3.
John L. Grace is president of Investor’s Advantage Corp, a Los Angeles-area financial planning firm that has been helping investors manage wealth and prepare for a more prosperous future since 1979. His On the Money column runs monthly in The Wave.