With the Election Looming, Have the Results Mattered Historically for Markets?

It has been argued that the upcoming election on November 3^rd between Democratic presidential nominee Joe Biden and the incumbent Republican president Donald Trump, is the most important election in history. I am not here to argue that; I believe every election is important. But, while important, has it really mattered who won (Democrat or Republican) historically for the markets? The short answer is no.

In terms of overall market performance, we’ve seen the markets do well under Republican and Democratic Presidents. In fact, since the Truman administration, just after World War II, only Richard Nixon and George W. Bush had negative market returns during their tenure.¹ Market reaction to those administrations had less to do with the economic policy and more to do with the Watergate scandal and the terrible events of September 11, 2001. If you look at S&P 500 performance from 1/1/1926 – 12/31/2019, stocks averaged the following²:

• All Years: +10.1%
• Presidential Election Years: +11.3%
• Mid-Term Elections: +8.6%
• Non-election years: +14.3%

The chart above proves that markets are efficient over time, regardless of who sits in the Oval Office. We realize that everyone has their political preference and desired candidate, but this is based off who is more in line with their personal values. It can be easy to get caught up in election-year predictions, but investors tend to benefit by taking a long-term view, staying focused on their goals and looking past election-year volatility. For a better understanding of the benefits of long-term investing, if you instead invested $1,000 at the beginning of this period (1/1/1926), it would be worth $8,960,000 through the end of June, 2020. Wow! That is over the course of 16 different presidents with a number of regime changes along the way. There will ALWAYS be reasons to want to sell stocks. Over this period, we had a few historical events that caused recessionary periods over the short term: Great Depression, Black Monday, Tech Bubble bursts, Global Financial Crisis and most recently COVID Pandemic, to name a few.

A “contested” election will make a financial advisor’s job more difficult for any year-end planning. Unlike most presidential elections, we may not know the winner of the 2020 vote on election night. Changes were made to provide more flexible absentee voting, so counties will need time to count those votes (at least 13 states allow absentee ballots to be counted if they are received the day after the election³). The U.S. Constitution sets deadlines for the election and federal law requires that we have a president on Inauguration Day, but there may be legal challenges along the way. Here is a chart illustrating the established process if there is no clear winner in the election:

We hope the above mentioned is a non-issue because we are anticipating a fair amount of year-end tax planning for our clients. It will make things difficult if we do not understand what the expected tax policy will be for the next 4 years. If Trump wins reelection, we know the current tax code will almost certainly carry over for the next 4 years (the tax cuts are set to expire year-end 2025). If Biden is the presumptive winner, and moreover a “blue wave” occurs, it will be important for us to look more closely at his tax plan and determine what we should NOW be considering for clients prior to year-end. Biden plans to roll-back the Trump tax breaks, tax income differently above a certain level ($400,000) and tax capital gains at the ordinary income tax rate (for those earning above $1 million). Under a Biden presidency, it could make sense to realize capital gains prior to year-end to ensure they are taxed at the current capital gains rates (15% – 20%). It may also make sense to save any unrealized losses for future years when they may be more beneficial in offsetting capital gains if gains become taxed as ordinary income for some. Other year-end considerations that we are evaluating for clients:

1. Roth IRA conversions
2. Forcing income from IRA’s (pushing income up in a lower tax year)
3. Realizing gains / losses

While there was enhanced market volatility due to COVID-19 in Quarter 1, we were proactive in client accounts to realize losses where appropriate to help offset future capital gains. With the strong market recovery since the end of the 1^st quarter, we are looking to rebalance accounts before year-end to make sure our client’s current allocation matches their risk tolerance and future spending. If clients have losses from earlier in the year, they can offset any realized capital gains and limit or eliminate any tax liability. The important thing for us is to make sure client accounts remain in balance and close to their target asset allocation and risk tolerance levels.

Election outcomes can have deep political, economic and social implications. Fortunately, the balance of power does not lie in the hands of a singular person or party, but rather in a system of distributed power designed to keep politicians somewhat in check. The democratic process and constant push and pull of the political process has provided the framework for both the US economy and equity market to become the largest in the world. In election years and other times of change, it is important for investors not to let news headlines knock them off course. Maintaining a disciplined investment approach, a long-term time horizon and a sensible rebalancing plan continues to be a sound approach in this election year, as in others.

If you would like to discuss your long-term financial plan in greater detail, please contact our office to schedule time with one of our wealth advisors. If you are not currently a client and value a second opinion, please contact our office at (888) 775-0950. Now is a better time than ever to look at your current investments and financial plan to make sure they are properly positioned for the unexpected.