With so many different market outlooks for 2020, it can feel as if no one is sure of what’s ahead, and if there’s one thing markets don’t like, it’s uncertainty.
You might be wondering what to expect especially with an election, which usually brings more volatility. However, while some election years produced negative returns, the average historical performance in an election year has been positive 11.3% (Anspach S&P 500). With that, it must be understood that only short-term market reactions are expected from the election results and as everyone knows, trying to time the market is extremely difficult. Therefore, we believe the best option for handling this expected volatility is to strap in and hold on. It must also be understood that just because the market reacted in certain ways in the past to certain catalysts, doesn’t mean it will do so again.
To begin with, let’s eliminate the idea that the market does significantly better under a certain political party. On average, the market has performed better under Democrats but since the market is up more than it’s down, it has performed well under almost every president. The only exceptions being Hoover (The Great Depression) and George W. Bush (The Financial Crisis) as shown below:
This begs the question: do the presidents even have that big of an effect on the market? There are policies and actions that can affect the economy and stocks directly (corporate tax cuts and trade wars) but in the long term does that really matter? The general public certainly believes that it does as “partisans have a strong desire to interpret the economy in a way that benefits their ‘team’” (Casselman).
Eighty-two percent of Republicans believe Trump’s policies have made the economy better while just 7% of Democrats would say the same. And while unemployment has reached all-time lows and the market has performed very well thus far in 2019, many economists still point to slowing global growth and massive bubbles such as U.S. debt as signs for nervousness.
According to Ben Levisohn, an editor for Barron’s, “a recession during an election year is very unlikely. Since 1950 only two have started during an election year” (Levisohn). This means that the chances of a recession in 2020 are 17.6%. This should alleviate some fears, while there is still a possibility. It’s also important to expect some economic slowdown as consumers have tended to spend less with the uncertainty that comes with elections. With that, we are already seeing some investor uncertainty as $60 billion was pulled out of stock funds in the third quarter, “flocking to bond funds and plowing a record amount into cash” (Lim, WSJ). While $60 billion is a tiny amount of the total mutual fund assets ($46.7 trillion) this was still the highest net outflow since 2009.
To conclude, we believe the party that is elected won’t matter in the long run for market performance. While it is expected to be a more volatile year due to the nature of elections, there is nothing to show that the market should perform better or worse simply because it is an election year. We do, however, believe that when a president is reelected there will be less volatility simply because investors will know what to expect.
Past performance is no guarantee of future results. Performance represents historical market performance and not an actual product or service. You cannot invest directly in the market. For purposes of this article, an election year is measured Jan. 1 – Dec. 31.
Todd Pisarczyk is the founder of Vancouver-based investment management and financial planning firm Sustainable Wealth Management. Kyle Winborne is a Client Service Associate at Sustainable Wealth Management. They can be contacted at email@example.com and firstname.lastname@example.org.