Dropping Some Election Heat

"Presidents are playing the hand they are dealt rather than dealer's choice." - Bespoke Investment Group on a President's impact on the economy.


Every U.S. presidential election is packed with anticipation and excitement. 24/7 news coverage, conventions, charged-up political ads, and heated debates on social media. Depending on your political affiliation, emotions can range from dread to hope.


Since we can't hide from it. We might as well own it. We strip out opinion, political bias, media bias, and get equipped with empirical evidence on the impact elections have (or don't have) on financial markets.


Let’s drop some election heat.


Source: Bespoke Investment Group


The above graphic shows Dow Jones Industrial Average (DJIA) returns for every U.S. President since 1900. The blue shading highlight Democratic administrations, while the red highlight Republican. This is obviously not a straight cause and effect outcome, nor does it imply this relationship will hold in the future.



Source: Bespoke Investment Group


The above graph shows sector level performance under President Obama and President Trump. Regardless of your preference, we can agree the two President's couldn't be more politically different. Interestingly, sector performance between the administrations is eerily similar. This supports the belief that there are bigger factors at play than which President is sitting in the White House.



Source: Bespoke Investment Group


The above graph shows average annual performance for the S&P during election years (blue) vs. all years (gray) since 1928. You'll notice most of the market volatility happens leading up to the election, rather than after. Post election, you can hardly tell the difference compared to a non-election year.



Source: Bespoke Investment Group


The above graph shows implied market volatility rising for the months of September, October, and November. That's consistent with the above graphic showing increased volatility pre-election. Financial markets don't wait for known events (like an election) to occur and then react. Much of the outcome is likely priced into financial markets before the event happens.


Source: Ycharts


The above chart shows the S&P 500 (SPY) for the past three months (as of 8/26/2020). It sounds ridiculous, but how this chart looks over the next two months (Sept. & Oct.) could predict the winner in November. The performance of the S&P 500 in the three months before votes are cast has predicted 87% of elections since 1928 and 100% since 1984. When returns were positive, the incumbent party wins. If the S&P 500 suffers losses in the three-month window, the incumbent loses.


Since 1928, the Schwab Center for Financial Research found that the S&P 500 ended on a positive note in 17 of the past 23 presidential election years—or 74% of the time—with an average annual return of 7.1%.


On the rare occasion the market did suffer a loss, it had nothing to do with the election. In 1932, the country was in the midst of the Great Depression. In 1940, the world was on the brink of war. In 2000, the tech bubble burst. In 2008, markets suffered fallout from the financial crisis.


Per political strategist James Carville, "It's the economy, stupid."


While we prefer evidence to emotion, we understand it's easier said than done, especially in today's politically charged environment. If you feel yourself getting worked up over the election, just remember:


  • Accept that politics is emotional. Recognize when you are acting irrationally.


  • Accept that you have biases.


  • Political drama is normal throughout U.S. history. Although it's easy to feel America is doomed, every generation has faced their challenges.


  • Making investment decisions based on election outcomes is a recipe for disaster. 2016 is a perfect example. Experts got everything wrong.


  • Let's assume you know who is going to win. There is seldom a clear path or actionable investment idea. Avoid the urge to do something because X or Y candidate wins.


For more reading on politics and investing, see Election Uncertainty and The Danger of Mixing Politics and Investing.

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