Elections & the Stock Market
October 16, 2020- “I’m worried about what the election will do to the stock market. If (Biden or Trump) wins, then I think it will plummet.” This is a common concern, regardless of political party. There is concern that the market will tumble if Biden wins because of his fiscal policy proposals. There is concern that divisiveness, polarization, and unrest will increase if Trump is reelected, causing the markets to drop. This fear of the market dropping is one of the few things that seems to unite some people from left and right. An investor may ask, “Should I move to a more conservative allocation until after the election?” It’s a valid question. However, this question and thought process go against what we believe about the market and historical precedents.
At Timberchase, we believe in the “efficient market hypothesis.” This hypothesis states that at any given time, all available information is already priced into the market. As a result, it is not possible to time the market consistently, because any information used to attempt to beat the market is already priced into it. In the case of the election, this means the uncertainty of the election, regardless of who wins or who controls the Senate, is already priced into the market. All investors are watching the election, and their thoughts, concerns, and beliefs are baked into how they are investing.
Many counter this by pointing to 2016, when the market rose quickly after Trump’s surprising victory. However, there are too many variables impacting the stock market for anyone to claim one variable as the reason. This is an example where correlation does not necessarily equal causation.
Let us also look at history for context. The below chart shows the growth of one dollar invested in the S&P 500 from January 1926 to December 2019, color coded by the party of the president during that time period. As you can see, the market doesn’t go up or down more if a Republican or Democrat is president. Instead, the only consistency is the market increases over the long term. The results are the same if you break it out by which party controls Congress, too. There is no historical precedent that leads us to believe the party controlling the presidency or Congress has a significant impact on the market either way.
What then should investors do about their portfolio allocation leading up to the election? The answer is nothing different. We believe an investor’s allocation should be based on unique personal facts and circumstances, and it should not change to try and predict what may happen as a result of the election. We believe timing the market, especially based on external factors, works against investors in the long run, and this election is no different.
Growth of a Dollar Invested in the S&P 500: January 1926-December 2019
Past performance is not a guarantee of future results. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio. Source: S&P data © 2020 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved.
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Information presented is for educational purposes only and is not personalized investment, financial, legal, tax, or accounting advice. Nothing on this website should be interpreted to state or imply that past performance is an indication of future performance. All investments involve risk and unless otherwise stated are not guaranteed. Be sure to consult with tax, legal, accounting, and financial professionals about your specific situation before implementing any planning strategies. Investment Advisory Services offered through Timberchase Financial, LLC, a Registered Investment Adviser with the U.S. Securities & Exchange Commission. Registration does not imply a certain level of skill or training.