Scott Ford, founder and CEO of Cornerstone Wealth Management Group
The presidential election always makes for an exciting year, but this election season has been a particularly wild ride. The election is right around the corner and regardless of who wins we’re sure to see significant changes, from healthcare reform to immigration policies. Naturally, investors are concerned about what’s in store for the markets post election day.
A Historical Election Year for Market Trends1
It’s amazing what we can learn from history. While past performance isn’t always indicative of future results, the market cycles and presidential terms are closely related. For 60 years — from April 1942 to October 2002 — there were 15 stock market cycles, each lasting around four years (the same length as presidential terms).
Diving deeper, we see that bear markets historically occur during the first and second years of presidential terms. The bull markets kick in during the third and fourth years. The fourth year is also the election year. In fact, a bear market defined as a decline in the S&P 500 Index of 15% or more over a period of 1-3 years never occurred during an election year from 1942-2002.
The Cause of the Cycles
The main reason why there’s a direct correlation between political and economic cycles is fiscal policy. The Federal Reserve has seen an increase in attention lately because they can impact the economy through setting interest rates and controlling the money supply. The executive branch of the government also has its own influential powers through spending and taxation.
It’s not surprising that politicians are well aware of the connection between the economy’s health and voter satisfaction. As the election approaches, the sitting president tries to boost the economy so he can keep his party in office through the next election. This exercise of fiscal policy to strengthen the economy leading up to an election contributes to election year bull markets.
After the election, the hype dies down and reality sets in. The new sitting president must get down to business, setting aside economic appearances. Just like starting a new job, it can take some time to build momentum, which is why he first two years of a presidential term are typically slow times in the markets. Once fiscal policy picks up and the presidential term wanes, the markets carry into the next election and the four-year cycle begins again.
What You Can Expect This Year
I’ll echo the media and political pundits who all agree that this is anything but a normal election. With two candidates whose opposing parties find polarizing, some people have gone to extreme lengths to predict the end of the economy and society as we know it. But beyond poll numbers and newspaper headlines, will the outcome make as big of an impact as people believe?
If we rely on historical data and look back to 1900, the election results won’t drastically impact your portfolio.2 However, the need to elect a new president (because the sitting president is in his second term), does have an effect, and the markets do not perform as well as in other elections.3
According to history, we can expect moderately positive market returns this election year, but they’ll slow down after the new president takes office. And since this election has been particularly unpredictable, investors should prepare for short-term volatility.
Should You Take Action?
I follow the philosophy that stock market investing should always be a long-term strategy — even when it is an election year. The stock market is innately volatile, so short-term investing should be conducted elsewhere. While we can all agree that we’re having an unusual election this year, many of the media’s claims of an upcoming doomsday and economic crash are blown out of proportion. The elections shouldn’t make a difference if your investment strategy is built for the long-term.
I understand that emotions and media noise can make us nervous about our investments. If you’re concerned about your strategy, it’s a good time to get a second opinion from a professional. Your advisor can talk you through things and calm your fears. This can keep you from making irrational investment decisions. I’d be happy to schedule a review with you. Give me a call at (301) 739-8505 or email me at [email protected].
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. No strategy assures success or protects against loss. Investing involves risk including loss of principal.
About Scott
Scott Ford, founder and CEO of Cornerstone Wealth Management Group and a Carson Institutional partner, serves on the investment committee as the technical strategist. He is a registered principal at LPL Financial and is a registered financial consultant. Scott is ranked in the top two percent of all LPL registered financial advisors based on annual production.
He was recognized as one of the 20 Rising Stars of Wealth Management in 2008 by Private Asset Management Magazine. Scott is the author of three books: The New York Times Bestseller, The Sustainable Edge, as well as Financial Jiu-Jitsu: A Fighter’s Guide to Conquering Your Finances and The Widow’s Wealth Map: Six Steps to Beginning Again. Scott and his family reside in Hagerstown, Maryland.
1https://gbr.pepperdine.edu/2010/08/presidential-elections-and-stock-market-cycles/
2http://www.kiplinger.com/article/investing/T043-C008-S003-how-presidential-elections-affect-the-stock-market.html#ECpfayA6M0iQEehv.99
3http://www.marketwatch.com/story/2016-predictions-what-presidential-election-years-mean-for-stocks-2015-12-29