The Importance of Staying the Course
Monday’s Iowa Caucus kicked off the start of another presidential year, and with it comes the uncertainty of not knowing who our next elected leader will be. Along with the political unknowns, many people fear the impact the next administration may have on their investment portfolios. Unfortunately, this fear may cause some investors to make emotionally driven investment decisions, such as withdrawing money from the markets.
Although the election’s outcome is sure to have an impact on many aspects of our lives as Americans, it will likely have less impact on the financial markets than many expect. Following are three reasons why it’s important to stay the course with your investment strategy throughout election years and beyond.
#1 – Markets don’t follow politics.
The economy and capital markets don’t pay attention to who’s in charge. They’re impacted by policy, not politics, and care about only one thing: future earnings.
The table below shows returns associated with different combinations of political parties controlling the White House and Congress.
You may find it surprising to learn that a full sweep of both the White House and Congress has less likelihood of causing market disruption than certain divided-government scenarios.
Across the various outcomes, there were only three situations that significantly impacted market performance, and only a Republican White House with a Democratic Congress resulted in below-average returns. Typically, market performance proceeds without correlation to the current administration.
#2 – Markets are less volatile during presidential election years than investors may expect.
The following chart tracks market performance across presidential election years from 1984 through 2020. Annual volatility of the S&P 500 Index averaged 16.5% during the 100 days before an election and 15.9% in the 100 days following an election. Both of these averages are lower than the 17.9% annualized volatility over the full time period, which shows that market performance proceeds without regard to presidential elections.
Source: Vanguard calculations, based on data from Global Financial Data (GFD) as of December 31, 2022. See link for additional information: https://investor.vanguard.com/investor-resources-education/article/presidential-elections-matter-but-not-so-much-when-it-comes-to-your-investments. This chart shows market volatility in the 100 days before and after presidential elections held between 1984 and 2020. In 1984, 1988, 1992, 1996, 2004, 2012 and 2016, the markets were less volatile than in 2020, 2000 and 2008. The most volatile year was 2008, with market volatility rising steeply around 50 days before the election and dropping steeply around 50 days after the election.
#3 – Sector volatility can represent investment opportunity.
While long-term market performance as a whole is largely unaffected by political uncertainty, certain sectors are more likely to experience volatility due to political factors. Because sectors such as healthcare and energy are more impacted by political policy, they may experience additional volatility during periods of political uncertainty.
However, this volatility also represents opportunity, which is another reason it’s important to stay the course with your investment strategy. Remember that the best days in the market are often concentrated around the worst days in the market. While recoveries are never guaranteed, taking your money out of the market to avoid a potential drop means you may miss out on the full benefit of a recovery.
In the following chart, notice the impact missing just a few days of market performance can have on your portfolio over time.
This chart illustrates the importance of staying the course with a strategic, diversified portfolio designed to weather market volatility across market cycles and throughout periods of political uncertainty.
The bottom line?
Our elected leaders and the policies they implement can have a significant impact on our daily lives. However, investment performance is less impacted by presidential policy than many people believe. During periods of political uncertainty, resist the urge to make emotionally driven investment decisions. As long as you remain invested in a diversified investment mix that’s in line with your goals, risk tolerance, timeline and personal financial situation, you should be in a good position to weather long-term market volatility.
Put simply, don’t let your political worries derail your long-term investment strategy. At Creative Planning, we’re here to help navigate your financial challenges and provide you with peace of mind. If you have any questions about your investment portfolio and how it may be impacted by political and/or economic forces, we’d love to have a conversation. Schedule a call with a member of our team.