Investing in an Election Year: Some Historical Perspective
With the candidates now officially announced, many investors are wondering how to best navigate the short-term market swings inherent in an election year. And, beyond the short-term market swings, there is the adjusted economic landscape to consider as a new president takes office. In a contentious election such as this, what are investors to do? We look in to historical election cycles for some apolitical answers to our common questions.
Before getting into the details, however, we want to be clear: we are in no way
advising that you abandon a prudent, long-term investment strategy. How you
implement these ideas will depend greatly on your individual situation and
strategy. Nonetheless, there are some general investment takeaways which
we can glean from history.
We analyzed the risk and returns of the S&P 500 for the last 10 presidential
election cycles. In that analysis we looked at the 12-months leading into the
November election and the 12-months after the November election to try and
glean some "seasonal" trends surrounding a full 24-month election cycle. Sure
enough, we found some.
Interestingly, the full 24-month election cycle tends to be in line with the long-
term market average for risk and returns. Of course, each individual election
tends to move around, but on the whole they line up fairly well with long-term
averages. That said, we also find that most 24-month election cycles tend to deliver average-ish returns with slightly less risk, though this effect tend to
be outweighed clouded by the extremes of 2008 and 1988.
When we look at just performance in the cycles, the general trend is positive,
though the three months prior to an election are worth missing. On the flip
side, the three months after an election are not worth missing, nor are the 12-
months post election, on average. When we look at the 3-months leading into
election day, we find that markets deliver a paltry -0.45% on average--and
they do it with much higher risk than average.
On the flip side, the 3-months coming out of an election tend to deliver
+0.57%--which is in line with the long-run expectation. The average 12-month
post-election return is +6.6%, which is pretty good considering 2008 and 2000
are factored into that figure (see chart below). Both the 3-months and 12-
months post election deliver risk and return which is well in-line with the long-
term average.
(Performance of the S&P 500 Surrounding an Election. source: author)
Interestingly, the current trend has tracked well below the average for an
election year--though it has returned toward the mean somewhat through the
summer rally. We find ourselves coming into the riskiest time for markets in
the election period.
Counter intuitively we found that, for the most part, 24-month election cycles
tend to generate less volatility than average, though that is not the case for
the six months surrounding election day. Volatility, while low, does tend to
decrease post-election.
The risk-reward plot summarizes this data. We have plotted each 24-month
election cycle, along with the 12 and 3-months before and after and
an election. The S&P 500 36-year average is the cross plotted in the middle.
(Annualized Return and Standard Deviation Data for the S&P 500. Source:
author)
In summary, there seems to be some "seasonal" variation in stocks when an
election is present. Risk is increased prior to election day, and tends to reduce
post-election.That reduction in risk tends to be accompanied by a nice rally
which continues into the next year.
Of course, any one cycle (such as this one) can buck the trend, so this does
not add to our knowledge of the future. Nonetheless, there is a case for being
underweight stocks coming into the election, and overweight coming out of the
election.
As usual, we recommend understanding when losses are too much to recover
from and developing a plan to mitigate those risks
(https://www.linkedin.com/pulse/how-much-too-franklin-parker?trk=mp-reader-card).
Bright Wealth Management, LLC is an investment advisory firm registered
with the Texas State Securities Board. Information presented herein is for
informational purposes only and does not intend to make an offer or
solicitation for the sale or purchase of any specific securities, investments,
investment advice, or investment strategies.
The information contained herein should be considered to be current only as
of the date indicated, and Bright Wealth Management, LLC does not
undertake any obligation to update the information contained herein in light of
later circumstances or events. This publication may contain forward looking
statements and projections that are based on the current belief and
assumptions of Bright Wealth Management, LLC and on information currently
available that we believe to be reasonable, however, such statements
necessarily involve risks, uncertainties and assumptions, and prospective
investors may not put undue reliance on these statements. This publication
and any other materials provided to you are intended only for discussion purposes and are not intended as an offer to sell or solicitation of an offer to
buy with respect to the purchase or sale of any securities.
The information contained herein should be considered to be current only as
of the date indicated, and Bright Wealth Management, LLC does not
undertake any obligation to update the information contained herein in light of
later circumstances or events. This publication may contain forward looking
statements and projections that are based on the current belief and
assumptions of Bright Wealth Management, LLC and on information currently
available that we believe to be reasonable, however, such statements
necessarily involve risks, uncertainties and assumptions, and prospective
investors may not put undue reliance on these statements. This publication
and any other materials provided to you are intended only for discussion purposes and are not intended as an offer to sell or solicitation of an offer to
buy with respect to the purchase or sale of any securities.
The projections and other information you will see here about the likelihood of various outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Past performance results relate only to the time periods indicated and are not an indication of, nor are liable proxy for future performance. The information contained in this document is the most recent information available to Bright Wealth management, LLC (except otherwise noted), however all of the information herein is subject to change without notice. Certain information included in this document is based on information obtained from sources considered to be reliable, however no representation is made with respect to the accuracy or completeness of such data. There is no guarantee that any investment strategy will achieve its objectives, generate profits or avoid losses.
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