Ep # 86: Do Elections Matter For Investment Returns? No, but Yes!
How big of an impact do mid-term elections have on investment returns?
Historically mid-term election years have been poor performing investment years. The good news is that the year following a midterm election year, the S&P 500 has been higher every single time since 1950. Getting on the other side of elections should be good news for investment returns. The most important thing is staying the course. In times of doubt, review your financial plan to make sure it still fits.
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Full Transcript:
Benjamin Haas 00:02
Hi everyone and welcome to A/B Conversations where we will help you CFP your way out of it. A podcast where you get into the minds of a couple Certified Financial Planners on how we think and feel about everyday financial planning questions and what should really matter most to you. A healthier financial life starts...now!
Adam Werner 00:25
Hey Ben, how you doing today?
Benjamin Haas 00:28
Excellent, Adam.
Adam Werner 00:30
That's great. For those listening to this in the future after we're recording, let's hope for some Phillies victories in the World Series.
Benjamin Haas 00:43
Yeah, and timing of this, you know, may be coming out right near election time and I'll share with you, you actually weren't in this meeting today. I was asked by a potential client today, so what's your background? And I'm sure you majored in this thing in college. I'm like, nope. Political science major. Found out what I didn't want to do, so it feels right to be talking politics today.
Adam Werner 01:07
Yeah, if there's one thing that I've seen over the last couple of weeks, bring our area together, it is the Phillies. But one thing that does not bring people together is politics.
Benjamin Haas 01:16
Oh man!
Adam Werner 01:18
That's where we're going to spend some time today and really the question for our purposes is, do elections matter in the scope of long-term investment planning or long-term financial retirement planning?
Benjamin Haas 01:36
Yeah, with the media in our face every day with the stuff, ads, we know many people are politically driven. The reality is decades and decades of research tell us that election years have no statistical significance on market returns. None, so it's not to minimize the elections are important, right? People have certain issues, it's people's rights, the direction of the country, strong feelings, they matter. But should you be making large bets? You really, really shouldn't.
Adam Werner 02:09
Yeah, and I know we've talked about this in different iterations of the podcast, different conversations. There are so many different variables that get factored into the markets, movements and volatility over time. Elections, politics, and policy absolutely have an impact. They are one of those variables but they're just that. They are one of many, many, many, many different variables so to be able to isolate any of those, let alone call it an election or a midterm elections year here as the sole variable to drive the markets or to feel like you're singling out, this is the variable, I'm going to isolate and make a huge investment decision based off of that. We certainly wouldn't say that that's a prudent thing to do.
Benjamin Haas 03:01
Yeah, and let me be, I want to say this a different way and make it sound really optimistic as we're talking about Phillies Astros here and elections. I think the good news and maybe let's go into some of this, the historical context is no matter how you're going to feel two weeks from now and these elections are over, whether you feel like you've won or lost, the good news is stocks are probably going to win. Right?
Adam Werner 03:24
Right.
Benjamin Haas 03:25
Historically, let's go through it. The market doesn't like uncertainty. Just getting on the other side of something like this historically, has been positive momentum and in a year where we're really not feeling any positive momentum with stocks, with bonds, with anything. Let's look at this contentious time as a moment in time and hopefully the other end of it is going to be the start of the next bull market.
Adam Werner 03:51
Yeah, so some of the research that I did for this, a couple of different places but mid-term election years in general are poor performing investment years, just in general. I mean that there are those types of data points, historically, that show of the four-year presidential cycle that this year is typically the worst year for returns. Now, we're certainly experiencing that. Is that completely driven by politics at this point? Probably not.
Benjamin Haas 04:28
No, not completely.
Adam Werner 04:29
Yeah. There are a lot of other things going on but the data does suggest that getting beyond and in this case November, but getting past the first three quarters of the year, having some certainty no matter what that looks like, the end of the year typically is the best performing quarter of the midterm election year. So to your point, it doesn't even matter, it may not even matter what the outcome of the election is. Maybe we end up with some sort of divided government which we can get into why we think that may happen or I guess maybe why that's beneficial in the eyes of the market. But historically speaking that last quarter of the year, it really does turn the corner. Historically speaking, maybe this year will be different. But yeah, that last quarter of the year is typically a really strong performer, just getting beyond the elections and getting beyond all of the political headlines and media and all of that, in the eyes of the market. It's one less piece of uncertainty at that point.
Benjamin Haas 05:34
Yeah, and that's where your initial comment here on politics can attract headlines, but really, what is it that the market is going to pay attention to. It’s policy. The reason the market likes the certainty of how the structure is going to be in, historically why it likes divided government is, it's harder to change the rules of the game on the way that companies would then have to adapt to a new policy or a new environment. I think we've really seen over these last couple of years, COVID-19 especially, having to change the way the economy was going to act to change the way that corporations, were going to have to try to drive profits. We have the ability to adapt quickly but no matter what happens in two weeks, nobody's out there projecting huge waves of change and I think we saw that in 2016 and in 2020. I don't remember ever, a more contentious presidential election in 2020 with everything that felt like it was at stake. I think there were a lot of people that could have got caught on either side of that going, I don't feel good about this or I don't feel good about this so I don't want to invest. As soon as we got on the other side of that, essentially, I realized it was blue wave by title, but it was like, straight down the middle essentially, as close as it could get in the Senate and the House of Representatives that the market really digested that as okay, it's going to be very hard for huge policy change to happen. So how did the market react? Very positively because it felt like okay, playing in the sandbox right now, this next two years or four years sandbox. Market knows the rules, companies are going to move forward and try to be profitable and that was really rewarded up until the beginning of this year.
Adam Werner 07:19
Yeah, and I'm glad you made that point because I'm going back to 2016 when Trump won the election, I distinctly remember being up till the wee hours of the morning
Benjamin Haas 07:32
You and I texting at 1am 2am.
Adam Werner 07:34
Yeah, watching these results come in and the futures markets essentially where the market would open up potentially the next day for trading, they were down 6% or 5%. It was it was a massive drop, essentially, that was happening overnight as these results were being digested. By the time daylight rolled around and the market was open for trading and the day finished, the market ended up positive over 1%. So just it's completely unfathomable to me at that point where it was Trump was kind of the outsider at that time. You couldn't even wrap your mind around him winning the election and then when it seemed like that was going to happen and the futures market essentially tanked. It really felt like, oh man, this is going to be big news. We're going to have to deal with this and then 12 hours later, it essentially solved itself.
Benjamin Haas 08:33
Do you remember setting up camp in your office, both of us and we were communicating, we were going down a list trying to communicate to every client we could because we thought this was Armageddon that the markets, the bottom have completely fallen out. Lessons learned by us too. That was what now six, seven years ago. But yeah, it's a good depiction of the market just loathes uncertainty and once it's able to digest a variable that at that point, felt known. It got itself right back to where it needed to. That pendulum should never swing too far and if it does, that is not the time to react. This election cycle is going to be no different. I realized that it will be emotional for many people on many different fronts but historically, just getting on the other side of it's been good.
Adam Werner 09:23
So on that note, I think there are more statistics. In a midterm election year, the current party that is in the presidential party essentially typically loses seats in the House and the Senate.
Benjamin Haas 09:42
Not typically, like a percent of the time. Like a lot. Like a significant amount of time.
Adam Werner 09:49
So in in our estimates then right now if that holds true and to your point, with a very slim margin as it is right now. There's a really good shot that we end up with that form of split government where the Democratic party may hold the presidency and then either the House or the Senate or both are controlled by Republicans. Then again, in the eyes of the market, that just means that no big policy introductions. Probably not any more major spending bills. Probably no major tax changes, which for our purposes, I think that's always on people's minds. It really does kind of set the rules of the game for the next couple of years at least and historically speaking, a divided government has been what we've been under for 60 plus percent of the time. Looking at my notes here, this is a study that JP Morgan put together. Since World War Two, 60% of the time, we've been in some form of divided government. So from that standpoint, it's what we felt the most and the markets do typically like that. There are always outliers, there's always variables that can prove that right or wrong. But historically speaking, that is kind of a nice environment for companies and for stocks to be able to thrive.
Benjamin Haas 11:10
Yeah, you and I are not here to shake a crystal ball and make some sort of prediction that we shouldn't be making. But if you take, let's stick to the theme, if you take kind of major policy change off the table as a likelihood in these next two years, then what's the market going to go back to focusing on? It's going to be the Fed, which it's focused on all year. There are debates here that we could make on whether they're closer to the end of a rising rate cycle or somewhere in the middle. But yeah, the market's is going to be forward looking on that and it's going to continue to look at some of these companies in the numbers on whether they can remain profitable. In both cases, I'm being the optimist here today going, I hope then that the worst of it is over. This election cycle being one less thing to worry about. It's going to be good, hopefully, for investors' psyche, to know that we've been in this period of uncertainty, but if we're moving out of that, hopefully good things will happen. Patience, will you'll be rewarded for continuing to be patient.
Adam Werner 12:14
Yes. So maybe I'll pivot a little bit more towards the personal side of how people can get themselves a little twisted in knots, just politically speaking. I mean, we know this country is very polarized when it comes to politics. It doesn't feel like I mean, it definitely feels like there are just the extremes right now, the political ads really kind of drive that home. But I've had conversations with people that want to influence their decision-making process on their investments with how they feel about the politics or the current party in office, or the party they think they're going to be in office, whatever that may look like. O shouldn't come as a surprise to anybody to hear us say that that's not a good strategy to make your investment decisions around. That is kind of the basis. There was a study by Pew Research Center, this was published, I guess it was a couple of years ago, I have to look at the notes. But the point being, you can see how it ebbs and flows over time for anybody who is Republican or leans Republican, you know, their feelings on the economy and on the markets are higher when there's a Republican holding the presidency and lower when there's a Democrat holding the presidency and vice versa. If you're Democrat and the Democrat, it is flip flopped all the way around. So that all makes logical sense, I guess but for purposes of investing, the data doesn't back that up. The long-term results in the stock market are the long-term results for a reason and they don't just magically get better because of how you feel about politics and who's in office at any given point in time.
Benjamin Haas 14:05
Yeah, and I know that we've said that and it makes it again, we're not trying to sound flippant. It's important for people to have their belief system, their values are supposed to be something that drives financial planning. But we've also said it before, what typically happens with investors when they get emotional is they make poor timing decisions. That's just statistically proven to and we can share that data through a slide if we need to for compliance but the average investor returns are much less than the index returns and the only way to explain that as its behavior. Its investor behavior, not the investments themselves. Look I don't feel good about the direction of this country so I'm going to sell out of my investments. Okay, but then you may be missing that next upswing which is always going to bear out fear when people say alright, I need to scale back. You can't afford to miss when things turn around and by the time you feel good or you feel better, you're probably late to that situation. So, we say that put politics in that camp. Don't let your political affiliations drive the investment decisions because you'll probably burn yourself.
Adam Werner 15:21
So on that note, I guess one last statistic that I'd like to bring up. We talked a little bit earlier about midterm election years are typically very volatile years in the stock market. The good news is that off of those lows of those midterm election years, so I should say the year following a midterm election year, the S&P 500 has been higher, every single time since 1950. 18 out of 18 years. I was going to say, should this time be any different? Maybe.
Benjamin Haas 16:03
It could be.
Adam Werner 16:04
Who knows? But we also know where we're starting right now, with as a pretty low starting point compared to where we started the year. So even just in a relative perspective, the odds of us having an up year next year, are higher than they were when we started this year, just again, based off of past returns. So again, not our crystal ball. Not making a prediction but history does show that the year after a midterm election year typically are positive years, just say typically. 100% of the time since 1950. 18 out of 18 times the market has been positive the following year.
Benjamin Haas 16:42
So, do elections matter? Yes. However, from an investment standpoint, is there any statistically significant impact on market returns? No. Other than to say more often than not, just getting on the other side of it is good for returns. Whether you're rooting for blue or red or somewhere in between, hopefully we all feel like winners in a couple of weeks from now.
Adam Werner 17:09
Yep. Stick to your plan. Stick to your investment plan. It's very hard to be disciplined right now. I know. We talked about that recently on an emotionally driven podcast right now with investments. But yeah, stay the course. Be disciplined, as long as that plan was the right plan for you whenever, a couple of years ago, a year ago, it should still fit, but maybe it's worth reviewing, just to make sure if any adjustments do need to be made. But yes, I think oftentimes, it is not the fun advice but stay the course. It may make sense to do nothing in the long run. But yeah, politics should be no different.
Benjamin Haas 17:53
And if you need to talk it out, let's talk it out.
Adam Werner 17:57
Yep. Well said.
Benjamin Haas 17:58
And go Phillies.
Adam Werner 17:59
Go Phils.
Benjamin Haas 18:01
See ya.
Adam Werner 18:02
Alright, thanks.
Benjamin Haas 18:13
Hey everyone, Adam and I really appreciate you tuning in. Please note that the opinions we voiced in the show up for general information only and are not intended to provide specific recommendations for any individual. To determine which strategies or investments may be most appropriate for you. Consult with your attorney, your accountant and financial advisor or tax advisor prior to making any decisions or investing. Thanks for listening! Investment advice offered through Great Valley Advisor Group, a Registered Investment Advisor. Great Valley Advisor Group and Haas Financial Group are separate entities.
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Sources:
https://view.ceros.com/lpl/midyearoutlook2022/p/5
