Investing In An Election Year
Maintaining a disciplined approach to investing is critical to achieving one’s long-term investment goals. We have compiled five key principles for investing in an election year.
Presidential elections always add an extra element of uncertainty to investing, and after a halcyon 2023 in equity markets, could come as a shock to investors. On top of assessing the path of the Federal Reserve, the stability of profits and the consumer, and navigating economic resilience vs. recession, investors will have to grapple with the barrage of headlines about the 2024 election. Although uncertainty can create opportunity, investors often make their worst mistakes during uncertain times, which can sometimes take years for portfolios to recover from. Therefore, maintaining a disciplined approach to investing is critical to achieving one’s long-term investment goals. In that light, we have compiled five key principles for investing in an election year.
Don’t let how you feel about politics overrule how you think about investing.
Political opinions are best expressed at the polls, not in a portfolio. One cardinal rule investors ought to follow: Don’t let how you feel about politics overrule how you think about investing.
Exhibit 1 shows a survey from the Pew Research Center asking Americans how they feel about economic conditions. The results show that Republicans often feel better about the economy under a Republican president, while similarly Democrats often feel better about the economy under a Democratic president. Investors often make portfolio decisions based on their economic outlook.
Yet, average annual returns on the S&P 500 during the Obama administration of 16.3% and during the Trump administration of 16.0% were almost identical and higher than the average return over the last 30 years of 10.1%. It is likely the macro conditions, like ultra-low interest rates enjoyed during both Obama and Trump administrations, were a more influential driver of above-average returns during those periods, rather than the policy prescriptions each president espoused.
Investors who allowed their political opinions to overrule their investing discipline may have missed out on above-average returns during political administrations they didn’t like.
Exhibit 1
Source: Pew Research Center, J.P. Morgan Asset Management. Pew Research Center, “Republicans, Democrats Move Even Further Apart in Coronavirus Concerns.” Question: Thinking about the nation’s economy, How would you rate economic conditions in this country today… as excellent, good, only fair, or poor? The survey was last conducted in March 2023.
Guide to the Markets – U.S. Data are as of December 31, 2023.
Markets don’t like uncertainty; elections almost always reduce it.
During election years, returns tend to be lower and volatility tends to be higher because markets do not like uncertainty and elections breed uncertainty. Since 1932, S&P 500 returns on average were 6.2% during election years vs. 9.6% during non-election years. Realized volatility was 16.5% during election years and 15.3% during non-election years (Exhibit 2). The average market drawdown in a given calendar year since 1980 was 14.2%, but 16.3% in election years vs. 13.5% in non-election years.
However, averages don’t tell the full story as recent presidential election years have been particularly volatile with historic market drawdowns. For example, the 2000 sell-off was related to the bursting of the tech bubble, 2008 was the onset of the financial crisis, and 2020 was the onset of the pandemic. 2020 experienced a sharp correction and then a strong rebound, both completely unrelated to the election.
Exhibit 2
Source: Standard & Poor’s, FactSet, J.P. Morgan Asset Management. Election years are presidential election years.
Data are as of December 31, 2023.
As highlighted in Exhibit 3, markets tend to be more volatile in the lead-up to the election, but after election day, that source of uncertainty is cleared, and, regardless of the result, markets move on and refocus on the fundamentals. In fact, median returns in the first three quarters of an election year were 1.9% compared to 3.1% in the fourth quarter going back to 1936.
This was the case in almost all presidential elections since 1980, with two notable exceptions in 2000 and 2008. The fourth quarter of 2008 was the unfurling of the financial crisis, but it should be acknowledged that in 2000, in addition to tech bubble-related headwinds, uncertainty around the fate of the election did cause market jitters. In the presidential election of 2000, we did not get official election results until a Supreme Court ruling on December 12, 2000. The S&P 500 fell by 4.2% between the election and that ruling. In contrast, markets were up 7.3% the week of the 2020 election despite not having an official result until the following Saturday.
Exhibit 3
Source: Standard & Poor’s, FactSet, J.P. Morgan Asset Management.
Data are as of December 31, 2023.
Market timing is just as difficult around elections as it is at any other time.
That is why market timing can be a dangerous strategy around elections. The two most recent presidential elections in 2016 and 2020 are prime examples of this. In the early hours of November 9, 2016, futures plummeted as election results were coming in, but markets closed 1.1% higher after that day’s regular trading session when the results were finalized, and as mentioned, markets rallied strongly after the 2020 election. In fact, in both cases there was a pre-election rally of 3% between the prior Friday and election day itself, so markets turned before many ballots were even cast. Some investors are eager to sit on the sidelines until election uncertainty passes, but risk missing subsequent rebounds which typically occur faster than investors can get back into the market.
Past performance during elections and presidencies indicates little about future results.
Investors always want to know how markets performed under different configurations of government or different years of a presidency. How do markets perform under a Republican sweep or Democrat sweep? What if a Republican wins the White House but loses both chambers of Congress? How do returns look in the first year of a presidency?
This information is relatively easy to compute but these returns tell investors very little about why markets performed the way they did and how markets are likely to perform in the future. Monetary policy, fiscal policy, economic growth, labor markets, corporate profits, and valuations are much better indications of future returns. Fiscal policy is driven by the government of course, but the configuration of the government matters and a sweep by one party doesn’t guarantee that it will accomplish all its campaign promises. In fact, due to growing political polarization, garnering consensus within a party is becoming increasingly difficult. For example, when the Democrats controlled Congress, President Biden had an ambitious Build Back Better proposal, which was later scaled down to a more moderate Inflation Reduction Act as a compromise between members of his own party.
Furthermore, just as calendar years are arbitrary markers when considering economic and market cycles, they also seldom align with actions of presidential administrations.
The economic context, not the political context, tends to be much more relevant to understanding historical market environments and returns.
The economy and markets tend to fare well under all configurations of government.
Over time, we observe that the economy and markets have been resilient irrespective of the political backdrop.
Exhibit 4 highlights real GDP growth and S&P 500 returns during Republican, Democratic, and divided governments (when one party does not control the White House and both chambers of Congress). Since 1947, real GDP has grown on average 2.8% under Republican rule and 4.0% under Democratic rule. The S&P 500 has returned 12.9% under Republicans and 9.3% under Democrats.
It would be easy to conclude that the economy performs better under Democrats and the market performs better under Republicans, but the sample sizes are relatively small. Republicans have controlled the government only 11% of the time since World War II, in the mid-1950s, early 2000s, and just before the pandemic. These were significantly disparate macro environments. Democrats have controlled the government 29% of the time, mostly in the post-WWII period and in the 1960s, but only in six years over the past three decades. Instead, the most common configuration of government is divided, which has produced 2.7% annualized real GDP growth since World War II, and 8.3% annualized returns on the S&P 500.
Ultimately, both the economy and markets tend to fare well under most government configurations.
Exhibit 4
Source: BEA, Standard & Poor’s, FactSet, J.P. Morgan Asset Management. Data is calendar year.
Guide to the Markets – U.S. Data are as of December 31, 2023.
The outcomes of elections of course are incredibly consequential, but the impacts to the economy and markets may not always be direct, immediate, or apparent. It is therefore nearly impossible to design an effective and repeatable investment strategy around an election cycle or anticipated political outcome. Instead, investors should let their long-term goals, time horizon, and risk tolerance dictate their portfolios, not the political cycle.