In less than a month, we will have a presidential election that may turn out to be one of the most contentious of all time. If the social distancing challenges associated with voting during a pandemic weren’t challenging enough, an expected spike in the number of mail-in ballots with differing state procedures has the potential to cause additional confusion and further delays in announcing a winner. There is a real possibility that early election results will be contested in the courts and a winner will not be known for days, weeks, or longer after Election Day.
Volatility around elections is not new. Recall the night of the 2016 election, as results trickled in and a Trump victory became increasingly likely, stock market futures dropped rapidly. The S&P 500 futures fell more than 5 percent in premarket trading, triggering a circuit breaker to halt trading. It was the unexpected result that jolted the markets, not the candidate. The markets had already priced in a Hilary Clinton win, which would have been a continuation of many of the policies of the Obama administration. News that Trump was going to win was widely unexpected and had very different implications to the economy as a whole. A new president can create more unknowns: the potential for major changes to regulations, taxes, and other shifts can all influence sentiment. Once the initial shock was over and the markets had digested the news, the markets closed the day after the election up over 1 percent.
Historically, volatility in the stock market is normal as an election approaches, and this election has the makings of one of the wildest we have experienced. This time around, markets are bracing for a more drawn-out fight rather than a single night of turbulence. The volatility concern is being driven more by the risk of a delayed result rather than a specific outcome.
Trying to speculate the market reaction to a specific event like a Trump reelection or Biden victory is extremely difficult for even the most seasoned investor. Indulging in political fears or expectations by making major changes to investments can be particularly damaging. Historical trends about stock market performance around presidential elections can help set expectations for investors about what has happened in the past. History can be a helpful guide, but as we all know, the future has no guarantees.
According to Dan Clifton of Strategas Research Partners, history shows avoiding a recession in the two years leading up to an election is a key indicator of reelection.1 In the last 100 years, every president who averted a recession during this period was reelected. Only one, Calvin Coolidge, went on to win reelection when there was a recession in the two years leading up to the election.1
His research also shows how stock market performance leading up to an election has also been a major indicator of who wins. The direction of the S&P 500 in the three months before votes are cast has predicted 87 percent of elections since 1928 and 100 percent since 1984. When the index is up, the incumbent party wins. If the index suffered losses in the three-month window, the incumbent loses.2
So, what can you do to reassure your clients when volatility looks inevitable?
Help them focus on what’s within control. Stressing about what might happen under the different permutations of the election won’t help anything. Instead, encourage your clients to focus on aspects of their financial situations that are within control, like how diversified they are against volatility in the markets.
Encourage them to stick with their plan. The stock market has gone up—and down—under all presidents. But over time, the trajectory has been positive. Getting too hung up on daily market gyrations and making emotional or ill-timed changes to investments can do damage to a well-thought-out financial plan. Provide a historical perspective and help them avoid emotional reactions.
As the election nears, take a deep breath (and have your clients take one too) and have confidence that well-devised investment plans should be able to weather the inevitable volatility that occurs when our country elects its President for the next four years.
Sources:
- Chris Kostantinos, “2020 Outlook Preview: U.S. Election Insights,” ETFTrends.com, last modified on January 10, 2020, https://www.etftrends.com/etf-strategist-channel/2020-outlook-preview-us-election-insights/.
- Kristin McKenna, “Here’s How The Stock Market Has Performed Before, During, And After Presidential Elections,” Forbes.com, last modified on August 18, 2020, https://www.forbes.com/sites/kristinmckenna/2020/08/18/heres-how-the-stock-market-has-performed-before-during-and-after-presidential-elections/#7cc789d94f86.
The information, analysis and opinions expressed herein are for informational purposes only and do not necessarily reflect the views of Envestnet. These views reflect the judgment of the author as of the date of writing and are subject to change at any time without notice. Nothing contained in this piece is intended to constitute legal, tax, accounting, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type.