John Iammarino gives his insights into elections and their effect on the markets.
It’s that time of the decade…Election season…commercials and politicians fear-mongering…telling us our country will be destroyed if we don’t vote for them…2020 has already certainly been one for the ages…so what does THIS election season mean for the markets…that’s what we will discuss on this month’s market watch.
With Election season starting last week, I wanted to discuss the markets as we close in on the 2020 Elections.
Black Rock Institutional recently put out a great research piece discussing the market during election years and how many investors think that presidential elections have an outsized impact on the market.
I think it’s evident that politics, especially in this day and age, ramp up emotions, and emotions tend to cloud investment judgment.
Now if you have watched past videos or listened to my podcast, you understand behavioral finance and the well-documented negative impacts emotions have on investment returns.
So, I think the best path is to stick to the evidence.
And the evidence says that stocks have an average 10% annualized return over all years and a 11% annualized return over presidential election years…
so basically the presidential election year shows no real difference than any other year.
However, because of emotions, presidential election years often cause investors to increase their cash allocation.
And folks, this election year has seen large outflows from stocks and bonds into cash allocations.
This is due to the combined effect of the pandemic and shutdowns and the ramped-up rhetoric of TODAYS POLITICS AND MEDIA.
Historical data also shows - whether there is a divided government…
or same party rule that after three years, the return of the stock market is 10% annualized in either scenario, with the best stock market year being the 3rd year of the presidential term and folks 2019 was right on cue with that trend
On average stocks, have historically performed better in election years when an incumbent president wins reelection (13.4%) vs when a new president is elected (9.4%).
Lastly, One interesting point is in regards to the cyclical down market period of Sell in May and stay away till November.
Well in an election year, that season actually shows a slightly stronger than normal market while November to April is slightly weaker. But again, there's not much difference in long-term returns.
To sum things up, historical evidence shows …The economy—and therefore the market—is simply bigger than the direction the political winds are blowing.
Sure, the upcoming presidential election is important.
Nevertheless, if we are able to take emotions out of the investment process and focus on the evidence. Then historically speaking the 2020 election should have less impact on the markets than some suggest.
Ultimately, short-term volatility -- in this case the election cycle -- should give way to the long-term economic fundamentals that drives the markets.
And Remember, your retirement is a long-term strategy.
So, as I always say, have an a holistic retirement plan that gives you the highest probability of success and gives you the confidence to stay the course.
If you have any questions or you need help designing a holistic retirement plan, then give us a call at 858-935-6210 or click on the link below to schedule an “in-person “or virtual consultation.”
That’s the August 2020 Market watch. Take care and enjoy the rest the rest of your summer.
- Brookstone Capital Management August 2020 Market Watch.
- Blackrock Institutional- Student of the Market August 2020 Election year special