How a U.S. Election Could Impact Your Long-Term Investment Goals
With the political divide growing, heated opinions have dominated headlines - and many experts are predicting market volatility.
How a U.S. Election Could Impact Your Investment Goals
When constructing a financial plan, it can seem like there are a million things to consider. Your life expectancy, the return needed to reach your goals, and your risk tolerance all play a role. In addition, short-term events like the U.S. election can influence the volatility in your portfolio.
In today’s infographic from New York Life Investments, we outline the factors threatening individuals’ retirement savings, and how a U.S. election has historically impacted investments.
A Precarious Future
In recent years, a variety of factors have increased longevity risk—the possibility that individuals will outlive their retirement savings.
Little Savings, Low Yields
With a higher life expectancy today than in previous generations, Americans need to save for a longer retirement. What’s more, the aging U.S. population will peak within the next few years—creating even more urgency.
At the other end of the working life scale, millennials will make up 75% of the global workforce by 2025. To avoid the same issues as baby boomers, they will need to set a strong retirement savings foundation from the start.
Layered Uncertainty
However, volatility doesn’t necessarily mean poor performance. In fact, it has generally translated to positive returns in election years. In the 23 election years since 1928, only four years have seen negative returns.
S&P 500 Stock Market Returns During Election Years
Throughout past market cycles, these two indices have displayed some degree of correlation.
The average return during these years was 11.3%.
Sector Performance
An incoming administration’s policies have the potential to sway market segments and sector returns. For instance, sector dispersion increased substantially around the 2016 election.
Which sectors have done well historically?
From the beginning of the 2008 election year to the end of the Obama administration, the S&P 500 Health Care Index increased by 103%, compared to the 55% increase in the S&P 500 Index over the same period. It is possible that Obama’s pro-health policies contributed to the sector’s growth.
From January 2016 to January 2020, the S&P 500 Aerospace and Defense Select Industry Index increased by 143% compared to the 72% increase in the S&P 500 over the same period. The Trump administration has increased defense budgets and deals, which may have contributed to the sector’s strong returns.
What About Bonds?
Historically, bond returns tend to be lower than stocks—and election years are no different.
Bond and Stock Returns During Election Years
During these years, the median average annual return for bonds was 4.79% compared to 11.44% for stocks. Bonds have provided important diversification and risk management during market downturns. However, upside returns are generally more limited.
Reaching Investment Goals
While historical performance helps us understand the big picture, returns during the 2020 election could vary widely.
Instead of trying to time the market, Americans can keep a long-term focus and, if suitable, consider investing more heavily in equities—a powerful option in the current low rate environment. This may help investors manage longevity risk, and potentially build a sufficient nest egg for retirement.