Who’s Going to Win the U.S. Presidential Election? For Markets, Does It Really Matter?
Membership required
Membership is now required to use this feature. To learn more:
View Membership BenefitsExecutive summary:
- Election years add a dimension of uncertainty to the market and can result in volatility
- But history shows that a balanced portfolio has generally ended an election year with a positive return
- Regardless of which administration takes power after an election, a balanced portfolio has also made strong gains in the years immediately after
- Remaining invested has proven to be the best strategy to build wealth over the long term
Election years are always interesting. Candidates share their vision of the future, introduce new policies and battle their way to the White House. Regardless of the outcome, the uncertainty leading up to the vote can be unsettling for many investors. This uncertainty is often amplified by sensational media headlines, especially in the first half of an election year.
However, this volatility tends to dissipate as election day approaches and history has shown that markets generally finish the year unfazed. Looking back over the last 12 election years, a portfolio consisting of 60% stocks and 40% bonds:
- Finished in positive territory 11 times
- Generated an average return of 9.8%, and
- Delivered only one negative outcome, which was driven by the bursting of the historic housing bubble
Investing after elections
But what happens after the new administration takes office and starts to enact its policies? To help illustrate that, we analyzed three scenarios that depict the average one-year and three-year gains of a $100,000 investment starting in the year following an election year.
- The first scenario (stay invested) includes a balanced allocation (60% equity/40% fixed income), where the investor stays true to their investment plan. This investor is rewarded for staying invested: they experienced gains averaging $12,300 and $35,200 over the one-year and three-year periods following an election year.
- The second scenario (wait to invest) assumes that same 60/40 investor wants to see how markets react to the new administration. This investor moves to cash for the first six months of the year following an election year, then subsequently moves back to their 60/40 allocation. Unfortunately, relative to an investor who stuck to their plan, their annualized return lagged the investor who stuck to their plan over both the one-year and three-year periods.
- The third scenario (cash) depicts an investor who could not bear to be invested due to the uncertainty under the newly appointed administration. This investor remains in cash in the years following the election and experienced an extreme setback to their overall ending wealth. Their gains over both the one-year and three-year periods were one-third that of the investor who remained invested.
It’s important to note that the cash returns were well behind the balanced portfolio even including periods of relatively high interest rates. Below you will see the stark contrast of growth generated from period to period. In the measured three-year periods from 1977-1999 aggregate growth from holding cash was roughly $162,000, far higher than the $32,000 generated from 2001-2023. This concept would also apply to the "wait to invest" scenario, although to a lesser extent as the investor only held cash for six months out of each three-year investment cycle.
It’s true that interest rates currently are relatively high, but they aren’t as high as they were in the early 1980s, when cash still underperformed the balanced portfolio. And even though the current rate environment is higher than we have seen in 15 years, a 4.3% return on cash might be unrealistic to maintain going forward.
As we know, uncertainty driven by an election year may tempt investors to divert from their investment plan. Some may move to cash until they are comfortable with the market reaction to the newly appointed administration, and some may move to cash and never re-enter. Historically, moving to cash in any form has not been rewarded and "sticking to the plan" has offered the most direct path to achieving desired investment outcomes.
The bottom line
We’ve seen that investing during an election year and investing in the periods following election years have been quite strong, especially if you’ve stayed invested throughout. Using the same scenarios discussed previously, but considering an initial investment in January 1975, the outcome of staying invested throughout dwarfs moving to cash, even on a temporary basis.
The U.S. government is an extremely strong institution with well-designed built-in checks and balances that have served the country for more than 240 years. Markets recognize this and adapt, not only to election outcomes, but to general adversity. Showing your clients that the market tends to be influenced by economic cycles, rather than political party will do a great deal in helping you keep them invested.
Disclosures
These views are subject to change at any time based upon market or other conditions and are current as of the date at the top of the page. The information, analysis, and opinions expressed herein are for general information only and are not intended to provide specific advice or recommendations for any individual or entity.
This material is not an offer, solicitation or recommendation to purchase any security.
Forecasting represents predictions of market prices and/or volume patterns utilizing varying analytical data. It is not representative of a projection of the stock market, or of any specific investment.
Nothing contained in this material is intended to constitute legal, tax, securities or investment advice, nor an opinion regarding the appropriateness of any investment. The general information contained in this publication should not be acted upon without obtaining specific legal, tax and investment advice from a licensed professional.
Please remember that all investments carry some level of risk, including the potential loss of principal invested. They do not typically grow at an even rate of return and may experience negative growth. As with any type of portfolio structuring, attempting to reduce risk and increase return could, at certain times, unintentionally reduce returns.
Russell Investments' ownership is composed of a majority stake held by funds managed by TA Associates Management L.P., with a significant minority stake held by funds managed by Reverence Capital Partners L.P. Certain of Russell Investments' employees and Hamilton Lane Advisors, LLC also hold minority, non-controlling, ownership stakes.
Frank Russell Company is the owner of the Russell trademarks contained in this material and all trademark rights related to the Russell trademarks, which the members of the Russell Investments group of companies are permitted to use under license from Frank Russell Company
The members of the Russell Investments group of companies are not affiliated in any manner with Frank Russell Company or any entity operating under the "FTSE RUSSELL" brand.
The Russell logo is a trademark and service mark of Russell Investments.
Russell 3000® Index: Index measures the performance of the largest 3000 U.S. companies representing approximately 98% of the investable U.S. equity market.
Ibbotson SBBI U.S. Large Cap Stock Index: Measures the performance of U.S. large cap stocks.
Ibbotson SBBI Intermediate Bond Index: The index measures the performance of a single issue of outstanding US Treasury note with a maturity term of around 5.5 years. It is calculated by Morningstar. Returns for 1934 to 1986 are obtained from the CRSP Government Bond File and returns for 1987 to 2014 are calculated from The Wall Street Journal prices.
Bloomberg U.S. Aggregate Bond Index: An index, with income reinvested, generally representative of intermediate-term government bonds, investment grade corporate debt securities, and mortgage-backed securities. (specifically: Bloomberg Government/Corporate Bond Index, the Asset-Backed Securities Index, and the Mortgage-Backed Securities Index).
Citigroup 1-3 Month T-Bill Index: An unmanaged index that tracks short-term U.S. government debt instruments.
Copyright © 2024 Russell Investments Group, LLC. All rights reserved. This material is proprietary and may not be reproduced, transferred, or distributed in any form without prior written permission from Russell Investments. It is delivered on an “as is” basis without warranty.
Russell Investments Financial Services, LLC, member FINRA (www.finra.org), part of Russell Investments.
RIFIS-26213
A message from Advisor Perspectives and VettaFi: To learn more about this and other topics, check out our podcasts.
Membership required
Membership is now required to use this feature. To learn more:
View Membership BenefitsSponsored Content
Upcoming Webinars View All
