While the financial markets have rebounded from the COVID-19 global pandemic, many investors are concerned about the lingering uncertainty that will arise from the longer-term impact as well as the near-term U.S. presidential election. In addition to closely tracking the impact of the ongoing pandemic, voters have other concerns such as mounting debt, taxes, unemployment, and economic stimulus top of mind. While the broad economic and financial consequences from COVID-19 remain to be fully understood, we can lean on historical perspective for insight into the impact of the November 3 general election.
Long-term investors should be as concerned about the election as any other short-term market fluctuation. Let's explore why.
- The president can influence fiscal policy. However, executive branch decisions and the impacts of those decisions, in fiscal policy, taxes, or economic reforms, take months if not years to play out, and few can understand the full ramifications during the election cycle.
- The stock market is not the economy. The stock market as represented by the S&P 500® Index is a capitalization-weighted index of 500 stocks. The S&P 500 is designed to measure the performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. This year has shown that the stock market can reach new highs during a global crisis where thousands of businesses are hurting, millions are out of work, and the gap between investor and economic sentiment feels very wide.
- Politicians like to make headlines; headlines are normally short-term noise.
- As the S&P 500 returns chart below demonstrates, over the long term the stock market marches upward through Republican and Democratic administrations, through market cycles, and, as 2020 has shown us, even through global pandemics.
S&P 500 Returns Through Presidential Cycles
Source: FactSet. S&P Dow Jones Indices. Date range: January 29, 1926-August 31, 2020. Monthly total returns used. This is not intended to constitute a forecast of future events, a guarantee of future results, investment advice, or an investment recommendation to purchase or sell. Past performance is no guarantee of future results. Investing involves risk, including possible loss of principal.
With a multitude of complex forces that influence capital markets, there is little correlation to be found that makes the case that any U.S. president meaningfully sways investment returns.
We advocate for investors to focus on their goals and their asset allocation, avoid knee-jerk reactions, and remain invested in a diversified portfolio. The election may be a topic at your next cocktail party, but it shouldn't be a topic at your next financial advisor quarterly review.