Should an Election Affect Your Asset Mix?
U.S. elections are a powerful force in investor psychology.
In fact, historically, investors pour more money into low-risk assets than equity investments surrounding election season. Following election years, investors reverse course and put their money back into equities.
This Markets in a Minute chart from New York Life Investments shows how investors have reacted to U.S. presidential elections over time, and why maintaining your long-term asset mix may be a better course of action.
Market Behavior During U.S. Elections
While investors allocated funds into safe assets in election years, what happened to the market?
| Average S&P 500 Returns in Presidential Election Years (1928-2016) |
New president is elected | 9.3% |
Incumbent president win | 13.4% |
All election years | 11.3% |
Source: Morningstar (Dec, 2019)
On average, the market has returned 11.3% in election years over the last century.
Markets also appear to prefer familiarity—when the incumbent president won, the S&P 500 averaged higher returns. Alongside this, it made no difference if a Democrat or Republican candidate won.
Implications for the 2020 Election
Still, with mail-in voting controversy and the anticipation of a results dispute, the 2020 presidential run has stoked greater volatility in financial markets. What reference point can we make to previously contested results?
Following the 2000 results between Al Gore and George Bush, investor fear ran rampant. Markets fell 1.6% when no winner was clearly determined. Compare this to the 2016 presidential run, when markets jumped 1% the day after the election.
But while short-term impacts of U.S. elections cause heightened uncertainty, it’s important to analyze if it’s an emotional or rational decision being made in response to market unrest.
Opportunity Costs
While investors typically run to safe-haven assets during these cycles, the table below illustrates how this may be less optimal for their portfolios.
| U.S. Treasury Bill (T-Bill) Rates |
8 Week T-bill | 0.09%
|
26 Week T-bill | 0.11% |
52 Week T-bill | 0.13% |
Source: U.S. Treasury (Dec, 2020)
Instead of paying attention to unknown variables inherent in every market, investors can focus on what the numbers are saying.
Building a Resilient Portfolio
So how can investors stay the course during election season?
Broad historical trends show that in spite of unique events, money in the stock market positively increases over time. Staying invested in your long-term asset mix can help capture these overarching trends.
One-off events such as an election provide an opportunity to take advantage of temporarily lower prices. This, coupled with the higher volatility levels that accompany election cycles, offer an avenue for your portfolio to be more resilient as it helps strengthen portfolio returns.
The diminishing returns of cash compound this effect. Over the last decade, cash returned close to 0%. These return rates could fall even lower in the years ahead as interest rates decline.
In short, it’s impossible to predict the future. Instead, equities and other fixed income investments have offered a number of advantages. Macroeconomic factors, such as falling interest rates and the supply of capital, have only highlighted this trend.