Election 2020 and the Markets – What’s to Come?

The US Presidential election is heating up. The big question on investor’s minds is, what can we expect? The markets dislike uncertainty. Add a pandemic and recession on top of it, and it brings everything to a whole new level.

What does this mean for the markets and your portfolio? Using history as a guide, here are some key takeaways.

Stocks during and after election years

The following shows the S&P 500 returns during election years and the subsequent year, going back to 1928. While there were some negative periods, most notably the Depression and 2008 Great Recession, average returns were largely positive. From 1928-2017, returns averaged 11.3% in election years, and 9.9% the year after.

 

Looking at previous administrations and what the returns are, it is hard to see any pattern. The President does have an impact, but there are many other factors that come into play.

Does the year within the Presidential term make a difference in performance? Not really. In fact, average returns were positive in every term year since 1926. The worst returns were in year two, although 8.6% by most accounts is not too shabby.

 

If we look at the annualized returns over cumulative presidential terms since 1926, almost all of them are positive. The worst years again were during the Depression and Great Recession:

 

What about bonds?
When we look at the Bloomberg Barclays Aggregate Bond Index since 1976 (as far back as the index data goes), bonds were positive in every election year and subsequent year except for one, the infamous 2013 “Taper Tantrum” when the Fed first hinted at the possibility of raising interest rates.

 

What about taxes?
This is one topic on many people’s minds. Many argue that recent corporate tax cuts have largely fueled the previous market rally. What if those go away? The following chart is quite interesting. The green line represents corporate tax rates, and the blue and orange lines S&P earnings. Shaded areas are recessions. This seems to suggest that earnings are resilient and trend upward over time, regardless of corporate tax rates.

 

What this all means
While the election creates another layer of uncertainty, this is not new. There have always been unsettling times over history in addition to elections, including wars, assassinations, runaway inflation, depressions, and now a pandemic. Yet over all these periods, investors were rewarded for the risks.

 

To realize the benefits, investors must accept some level of uncertainty. Markets have climbed the proverbial “wall of worry” since the beginning. Bonds have shown they can smooth out the ride, and while they can fluctuate in value, they do a great job to reduce downside volatility.

While it’s evident both parties have had significant ups and downs, investors keeping their portfolios aimed at the long-term, rather than reacting to shorter-term politics, have been handsomely rewarded over time. We do not believe this will change going forward.