As the craziest year of most of our lifetimes marches on, the highly anticipated 2020 election is now one week away. The country appears more divided than many can remember. Each side thinks that the other will run the country into the ground. One thing we can all agree on is that it will be nice to watch television next week without the abundance of political ads. There also seems to be a consensus view that we aren’t going to know who the winner is on election night.
First and foremost, the only prediction we’ll make is that the world probably won’t end no matter who wins. There have been many presidential elections in history (58 to be exact) and we made it through them all. Elections are generally a short-term news event, particularly when it applies to financial markets. The headlines and the uncertainty drive volatility. Days like yesterday are a reminder of that. One thing you have to constantly remember in investing is that it is a long-term game. In all but one election since 1936, the 10-year performance of the market following the election was positive. In most cases, it more than doubled.
While we are not guaranteeing that the next 10 years will be positive or that your money will double, we will venture to say that historical data is in favor of staying the course and tuning out the short-term noise associated with the election. We did some election posts back in August with data showing market performance under different presidential and congressional outcomes. If you look back at those posts, you will find that the market made it through every scenario. It is also worth noting that the market increased over 400% during the time period of 1936 to 1963 with a top marginal tax rate of 79%.*
That all makes a lot of sense, but this time is different. Some of you with strong opinions towards one side are probably thinking that. “This time is different” is a four-word phrase that has been proven wrong over and over throughout history. While history does not repeat, it often rhymes. This time will certainly have its own uniqueness to it, but the overall experience will probably not be all that different than other points in history. So, what should you do? Well, if you are very nervous about how the election will impact your portfolio, then you should have a conversation with your advisor. The only spoiler alert is that neither you nor your advisor knows with complete certainty what will happen. The more productive way to look at it is to evaluate the risk in your portfolio. Whether it is the election or some other event we’re not yet thinking of, you need to be comfortable with the risk you are taking. Don’t let your emotions get the best of you in the short term and try to time the market. You should be rewarded for that discipline in the long run.
*Investech Research Newsletter – October 16, 2020