Stocks Are the True Independents in This Election.

Stocks Are the True Independents in This Election

Election results don’t drive financial market outcomes over time. 

Key Takeaways  

  • Presidential elections often lead to volatility in the markets. But “betting” on a political outcome is difficult and potentially costly.
  • Markets historically go up no matter which political party wins a presidential election, so it typically pays not to try to time the election but stay invested for the long term instead.
  • We believe taking a balanced approach is best. Stick to your saving and investing plan despite the short-term volatility that political, economic and market conditions may bring.

The timing of this year’s presidential election feels momentous. We are amid a global pandemic and social protests in the U.S. The selection of a certain candidate or political party can result in significant changes to economic, social and environmental policies that affect particular industries or market sectors.

But our research shows election results don’t drive financial market outcomes over time, so it doesn’t pay to try to time your investments around elections. We believe your own saving and investing behavior should drive your financial success—which includes developing and sticking to a long-term plan.

The political party controlling 1600 Pennsylvania Ave. isn’t likely to affect your retirement needs or the amount of money you’re saving for a down payment on a home. The levers you can pull to improve your chances of enjoying a fully funded retirement or financing a college education exist independently of the party in office.

The Volatility is Real

We understand the anxiety you may be feeling as we approach the election. It’s natural, and it’s real. Figure 1 shows that market volatility increases near the time of the Democratic and Republican party national conventions through Election Day. But this volatility has historically subsided just as quickly after the election. 

Figure 1 | Volatility Historically Rises prior to the Election and Falls Afterward

Source:  FactSet, U.S. National Archives, Library of Congress, American Century Investments. Average annualized standard deviation of rolling 30-day S&P 500 price returns for 22-periods (22 elections since 1932). Time period of 1-year before election date through 1-year after election date. Analysis from 11/6/1931 to 11/8/2017.

If we widen our lens to look at market volatility in the years before and after presidential elections, we find that volatility stayed in the same general range. If electoral outcomes had huge impacts on markets, we would expect to see some big divergence or changes. We just don’t see evidence that electoral outcomes move markets.

But Don’t Bet on Taking Advantage of Historical Trends

Some investors might look at Figure 1 and conclude they could gain something by trading out of markets around elections and getting back in later. Our analysis shows, however, that it may be best to simply stick to your knitting and not jump in and out of the market.

Figure 2 shows the average growth of a hypothetical $10,000 investment for four different trading strategies around presidential elections since 1932. Each row represents an investor with $10,000 to invest on the same day six months prior to the election date:

  1. Remained invested: In the first scenario, the hypothetical investor invests the $10,000 and then remains fully invested through the six months after the election. Historically, this would have resulted in the highest average balance six months after the election date.
  2. Invested after the election: In this scenario the investor chooses to keep the $10,000 in cash prior to and during the election date. The investor then invests the money after the election date and remains fully invested in stocks for six months after the election.
  3. Invested before the election, but then moves to cash:  In the third scenario, the investor invests the $10,000 six months prior to the election and stays invested through the election date. The investor then moves to cash immediately after and stays in cash for six months after the election.
  4. Remains in cash: In the last scenario, the investor keeps $10,000 in cash for the entire duration analyzed. Historically, this would have resulted in the lowest average balance six months after the election date.

Figure 2 | “Betting” on Politics With Timed Trades Around Elections May Hurt Long-Term Wealth

Investment Strategy Value After an Election

Source:  FactSet, Ibbotson and Associates, Inc., U.S. National Archives, American Century Investments.

The Invested arrow is 100% equities represented by the S&P 500 Price Return from 4/30/1932 to 12/31/2019. The Not Invested arrow is 100% cash represented by 1-month Treasury Bill returns from 4/30/1932 to 12/31/2019. Ending values represent the average returns of 22 elections from 1932-2016 (4/30/1932 to 5/31/2017).

6 months before: May-Oct of election year. Presidential Election: Nov of election year. 6 months after: Dec-May after election.

Markets historically go up more often than they go down over time. And because market gains often come in short, sharp jumps, being out of the market when these jumps occur could seriously affect your long-term returns. That’s why the best result in the hypothetical example is staying invested, while the worst result is staying out of the market for the longest period. Trading in or out around the election produced outcomes between the two extremes.

The Likely Drivers of Returns in the Short Run are Independent

The U.S. Federal Reserve (Fed) has a significant effect on financial market returns and operates independently of electoral outcomes. It’s no coincidence that recovery from the February-March bear market began March 24, the day after the Fed announced extraordinary measures to support the economy and financial markets.

COVID-19 also remains a large source of market uncertainty, and the disease operates independently of electoral outcomes. Economic fundamentals drive market performance over time, not elections or the party in power. Whether we have a V-, U- or W-shaped recovery is likely to have a greater impact on financial returns than who occupies the White House.

So, What Should I Do About the Election?

The analysis we’ve seen suggests that investors who do best over the long haul stick to their plans and stay diversified, not try to time the market by trading in and out of asset classes.

Figure 3 demonstrates how performance and leadership vary across asset classes during election years. The only discernible pattern we see is that a balanced approach has delivered performance consistently in the middle of the pack, avoiding the big swings we see elsewhere.

Figure 3 | Average Election Year Asset Class Returns

Past performance is no guarantee of future results. Investment returns will fluctuate and it is possible to lose money.

Data from 1/1/1979 to 12/31/2019. Source: FactSet, U.S. National Archives, American Century Investments. Annual index performance during U.S. Presidential Election years from 1980-2016. Asset class returns since 1980 due to data history constraints. Emerging Markets starts 12/31/1987.  For history, gross returns used from 12/31/1987-12/31/2000 and net returns used from 12/31/2000-12/31/2019.

*60/40 Diversified Portfolio consists of 60% Russell 1000 Total Return Index and 40% Bloomberg Barclays U.S. Aggregate Bond Total Return Index.

US SC (U.S. Small Cap) represented by Russell 2000 Total Return, US MC (U.S. Mid Cap) represented by Russell Mid Cap Total Return, US LC (U.S. Large Cap) represented by Russell 1000 Total Return, EAFE (Developed non-U.S. equities) represented by MSCI EAFE Net Return, Cash represented by FTSE 3-Month Treasury Bill1, U.S. Gov. Intm. represented by Bloomberg Barclays U.S. Government Intermediate, Corps (U.S. Investment Grade Corporate Bonds) represented by Bloomberg Barclays U.S. Corporate Investment Grade, EM represented by MSCI Emerging Markets Index.

Average election year since 1980 is the average return of 10 elections since 1980. Emerging markets average begins 1988 due to lack of reliable data for 1980 and 1984. Average non-election years since 1979 is the average return of 31 non-election years since 1979, Emerging markets average begins 1989 due to lack of reliable data until 1988.

Betting on politics is hard and potentially costly even if you pick the winning candidate or political party. You must not only correctly predict the winning candidate, you must also time trades perfectly and correctly foresee the winning candidate’s effect on the markets. Don’t let election predictions or results impact your investment choices. We believe successful long-term investing relies on developing and sticking to your financial plan. 

1 The FTSE 3 Month US T Bill Index Series is intended to track the daily performance of 3 month US Treasury bills.

Diversification does not assure a profit nor does it protect against loss of principal.

Generally, as interest rates rise, the value of the securities held in the fund will decline. The opposite is true when interest rates decline.

Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost. Past performance is no guarantee of future results.

The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.

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