As the 2020 presidential election looms, many investors are pondering how the results will impact their stock investments. Is there a perfect scheme for a temporary gain? Could a change in leadership or political party cause a drastic shift in your financial foundation?
Data is available for each election year since 1928 for Standard & Poor’s 500 Index (S&P 500). If one were to examine each presidential election year closely, you could observe a trend: each posted a positive return for the index fund, except for three years, including 2008. However, consider another market observation: during the entire twentieth century, every mid-decade year that ended in a “5” (1905, 1915, 1925, etc.) returned a profit. Is it a good idea to try and game the cycle? Is investing based upon these correlations a sound strategy?
Brad Sanders, Managing Director of Tectonic Advisors points out that it is really easy to assign causality in the market: “The past is definite, but the future is uncertain. Biases are everywhere and we often don’t know we have them. Recency bias is a big one. We have all this data now that you can backtest. You can find lots of strategies that work but perhaps you’ve cherrypicked data. Nobody can time the future of the market. It’s been proven.”
Human behavior drives markets – not the president.
It’s human nature to seek out patterns; however, it doesn’t always mean the patterns we discover are relevant to the decisions we make, particularly financial ones. In fact, there’s an entire field of study dedicated to the psychology of financial decision making: It applies insights of psychological research to finance. By closely examining the connection between the two, we can better root out bias that may drive us to identify patterns in past performance or influence our emotions.
That’s especially important within our increasingly volatile political landscape. We may make emotional investment decisions based on predictions for the election or Trump’s tweets. It is truly difficult to separate financial decisions from the political circus in order to keep calm and stay smartly invested.
“In and of itself, the president doesn’t wield the sword that drives the economy,” explains Brad. “They do very little other than impact short term perception. The situation where you could see a lot of change and uncertainty in the market going forward is if a single party sweep took both the presidency and congress. If there’s gridlock, the president can’t force through the platform they were running on. That’s why we have checks and balances. Right now, it is too early to speculate the results for 2020.”
Mitigating Political Risk
A Democratic president may push to hike corporate taxes and increase regulatory burdens. If re-elected, Trump could escalate trade wars. While political risk used to be a term mostly used in foreign policy, increasingly the average American faces it as a risk in financial markets and the economy.
While understanding past trends and the political landscape are valuable for investing, it’s not the end all be all. Understanding your tolerance for risk, financial goals and much more are all components of a sound financial strategy that should be developed with a trusted advisor. By doing so, you are in a much better position to weather a downturn (or take advantage of a bull market) and keep your investments working for the long term.
“Human behavior drives the markets. It goes up, and it goes down. When I say that, it doesn’t mean that you shouldn’t reallocate a certain way, depending on the political landscape. This election will has the potential to be a little more volatile because the current sentiment around politics is charged and polarized,” notes Brad.
Remember: it’s more important to have a smart, long-term plan than making temporary gains, so that your money can weather any political landscape. Now is a good time to go back and reevaluate your portfolio, financial plan and risk tolerance with your advisor. This way, you can feel comfortable about the way you are invested during election season.
Feeling uncertain about your plan or advisor? Through decades of experience, CWA’s financial teams empower business owners with the knowledge they need to overcome their uncertainty. Whether it’s an election year or not, CWA is always there to answer your looming questions with the advice and tools you need to succeed.
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