Every election cycle brings with it a great deal of passion and patriotism along with general angst. This year is no different, in fact we all may be feeling it a bit more intensely due to COVID-19, and the nature of personalities we have vying for the top spot of our nation. There are so many topics at play, but as a financial advisor, the one question I get every election cycle, and this one is not different, “How will the markets respond to x or y taking office?”
As a researcher, I tend to initially look at history for context. And history tells us some interesting things. The short answer is markets have rewarded long-term investors over a variety of presidents. On average, market returns have been positive in both election years and the subsequent year following an election. In fact, since 1928 the average return of the S&P 500, the index that represents the top 500 U.S. companies, has been 11.3% during an election year and 9.9% the year following the election. Interestingly, international markets, as measured by the MSCI index, have resulted in an average return of 14.4% the year following a U.S. election. Sprinkled throughout have been some devastating years and some out of the park homerun years, but generally, markets trend upwards.
We cannot ignore the elephant in the room named COVID-19, which in my opinion is the real concern for markets this time. Of course, when we hear about a possible contested election followed by civil unrest this uncertainty and general uneasiness across the nation has the possibility to create market disruption, but it will be short term. Once the ballots are counted and the election is over, the Jan. 20, 2021, inauguration will take place and things will move forward. If you do not believe me, remember those hanging chads in 2000? The Bush vs. Gore election was on Nov. 7, 2000, and we did not know the results until the Supreme Court ruling on Dec. 12, 2000, over a month later. The U.S. market responded to this surprise and was down during this period by 4.24%.
You may recall what followed was a burst of the dot.com bubble the following March, which was much more impactful on the market than the election. The disruption we may face in November, I believe, is already built into the current market prices. Remember, stock prices consume current information and price accordingly to represent future earnings potential.
Back to COVID. What will the impact be on small businesses? How will we, as a country, repay the enormous amounts of debt we are incurring because of the financial stimulus package(s)? How will companies reinvent themselves to thrive in our new normal?
What companies will not survive? When and who will develop the vaccine that provides protection and safety for the world?
We do not have answers to any of these questions, just guesses. Though the consensus by most investment firms is slower growth for the foreseeable future.
What should you as an investor do? Focus on what you can control. Ask yourself how do I need to adjust my family’s financial plan to deal with these unknowns and possible slower future growth?
Short-term, you may need to make some adjustments, but long-term, and by that I mean five years or more, barring some major life event, you probably need to revisit your plan, make sure your resources and your investment allocation are aligned with your goals, make adjustments as necessary and don’t let yourself or your portfolio get derailed by the emotions of the moment.
If you do not have a financial plan, now is a good time to get one.
Stephanie W. Mackara is president of Charleston Investment Advisors LLC.