Uncertainty surrounding the future of our country’s political direction can make it difficult to feel comfortable making financial decisions leading up to November elections. With two presidential candidates who have entirely different views, it only makes sense that investors might be leery of putting money into the market. Some might even consider taking money out. To put some of those fears to rest, let us examine how the markets have performed historically to gain insight into what we can expect.
Political elections represent huge milestones for our country. With constant media attention, it is easy to make the leap to thinking they can dramatically affect your portfolio, but the historical data tells a different story. Exhibit 1 shows how the S&P 500 has performed in the past 23 elections dating back to 1928 (ANSPACH, 2020).
As you can see, the S&P 500 has only fallen during 4 of the last 23 election years. Each of those dips can be linked to an external factor:
- 1932 – The Great Depression
- 1940 – World War II
- 2000 – .com bubble burst
- 2008 – Great Recession and the housing crash
The conclusion to draw from this data is that the market is far more sensitive to large macro factors than it is to political elections. There are a few good reasons for this:
Companies are global
We tend to imagine political leaders controlling the destiny of U.S. companies and the stock market. In truth, 29% of the S&P 500 is concentrated between Alphabet (GOOG), Amazon (AMZN), Apple (AAPL), Berkshire Hathaway (BRK.B), Facebook (FB), and Microsoft (MSFT). Six companies make up over one quarter of the market (Winck, 2020), and each company has operations outside of the United States. In fact, Alphabet makes more of its revenue outside of the United States than it does inside. These companies might be U.S.-based, but they operate in countries all over the world. Some of these countries have political systems that look very different from the U.S., but these companies have managed to navigate these challenges. Diversification of investments can help to stabilize assets during an election year, see how our financial advisors assist our clients for success on our Portfolio Management page.
Large companies are adaptable
The large companies that move the major indexes can adapt. Scale brings with it the added benefit of capital. Large companies have war chests that allow them to pivot around political changes. Apple alone has close to $200 billion in cash on its balance sheet. No matter what happens, it can deploy this cash to find innovative solutions to changing environments.
The markets are diversified
Like a good investment portfolio, the major indexes are diversified. When some industries suffer, others benefit. For example, the healthcare sector might decline, but alternative energy might soar. It is important to understand these are just predictions, and no one knows what sectors will benefit or be hurt during any presidency. Under the Obama administration, gun manufacturers recorded record sales, and oil production grew 88% from 5 million barrels a day in 2008 to 9.4 million barrels a day in 2015 (Rapier, 2015). Both of these industries would have been seen as targets in an Obama presidency.
We put a lot of time and energy into thinking about politics and imagining how the political landscape will shape our investments. However, no matter how polarizing elections may seem, companies are global, and they will find a way to survive and thrive. The last bit of information I will leave you with you is a 30-year annualized return chart for the S&P 500 (Carlson, 2016);
Over the 90-year period between 1926 – 2016, the S&P 500 had a 30-year annualized return just shy of 8% minimum. This period spans a world war, the Great Depression and Great Recession, a presidential assassination, 9/11, and multiple presidential party changes. Betting against the United States capital markets has never paid off. Even though the future is uncertain, it is a safe bet that investing for the long term is the correct choice.
– Max Lucas, Wealth Planning Intern
To learn more on how we invest, view our investment philosophy or contact us by phone at (509) 735-7507.
ANSPACH, D. (2020). Stock Market Performance in Presidential Election Years. The balance, 1.
Carlson, B. (2016). 30-year S&P 500 returns are pretty impressive. Business insider, 1.
Rapier, R. (2015). The Irony of President Obama’s Oil Legacy. Forbes, 1.
Winck, B. (2020). The market’s biggest stocks hold the largest share of the S&P 500 in 40 years as mega-cap tech returns swell. Business Insider, 1.