Listen Now:
The Smart Take:
It’s almost Election Day in the US, and opinions are flying. But should elections sway your long-term investment strategy?
Find out in this episode as Tyler Emrick, CFA®, CFP®, cuts through the political noise exploring historical market performance in past election years and Presidential terms. Sharing how you can use this data to set your emotions aside and make more informed investment decisions.
Here’s some of what we discuss in this episode:
- Elections provide a great degree of uncertainty, which can cause emotional and usually illogical behavior.
- What market returns have looked like for election years dating back to 1928.
- The market’s performance the month that the election took place.
- A look at the annualized returns during US Presidential terms.
- What can YOU control?
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The Hosts:
Kevin Kroskey, CFP®, MBA – About – Contact
Tyler Emrick, CFA®, CFP® – About – Contact
Episode Transcript:
Tyler Emmerich:
With Election Day looming, the market chatter is louder than ever, but how should elections impact your investment decisions? Join us as we break down historical market trends during an election year and the years to follow, debunking common misconceptions that lead to bad investment and financial decisions, all coming up today on Retire Smarter.
Walter Storholt:
Well, I was trying to decide between, we’ve got a hot topic today and ooh, it’s hot outside too, or maybe taking it in a different direction because you might’ve heard Tyler sounding a little bit under the weather. And so, since we’re talking politics today, maybe he’s just so sick of it that it’s made him actually sick. I don’t know. I couldn’t pick a lane, Tyler, so I’m going with both of them to start off today’s episode.
Tyler Emmerich:
Actually, you know what? I’m good with that. I’m down with that. No problem at all on my end as I sit huddled in my office here with my jacket on at 80-degree weather outside-
Walter Storholt:
Oh, my goodness.
Tyler Emmerich:
… kind of still shivering. So, for the listeners, I was talking to Walter a little bit before we were prepping for the podcast this morning. And I was talking to him about how my oldest, my five-year-old, she had been under the weather coughing up a storm for the, really, last couple weeks. And I thought I was out of the woods and then all of a sudden it came and hit me. So, over the holiday weekend, we’re just after July 4th here, coughs came on, the colds came on, and I seem to be handling it with a lot less grace than what she did as she was still coughing, wanting to go outside and play and hang in there. And here I am kind of huddled over going, “Oh, boy, are we going to make it through the day?”
Walter Storholt:
They share their sicknesses willingly and bounce back from it much faster than we do it seems.
Tyler Emmerich:
They do, they do. And then you pile it on. I mean, we got, I think a lot of good data in the podcast coming up today and a lot of good stuff, conversation. But boy, being sick and talking a little bit of politics, it’s going to be a doozy of a morning, to say the least.
Walter Storholt:
Well, we appreciate you pushing through and trying to make some sense out of this for us, because it is an important topic. Even if you are of the type that likes to just stay away from politics and doesn’t like talking about it with friends, and family, and just doesn’t even like following it that much, well, you’re still needing to pay attention to it, especially when it comes to your finances and your money. Perhaps that’s what Tyler’s going to help reveal or help us understand a little bit on today’s show. As we try to navigate the markets in an election year and obviously this is something that we… I mean there are elections, of course, every year, but presidential elections every four years. And so, this is a recurring theme every once in a while that we’ve got to pay attention to, and a lot of people have different beliefs about what that means to the market, where that’s going to take us. So, I’m interested in your perspective on all of that today, Tyler.
If you’re new to the show, by the way, Tyler is, of course, a CERTIFIED FINANCIAL PLANNER at True Wealth Design, also a chartered financial analyst as well. Based in northeast Ohio, with offices in southwest Florida, greater Pittsburgh area, and really serving clients all across the country. You can find us online at truewealthdesign.com. I’m Walter Storholt and glad that you’re choosing to join us on today’s episode for this good topic. So, where do you want to begin, Tyler? In the world of politics, I’m sure there are many options we could take as a starting point.
Tyler Emmerich:
Well, I think we’ll take a look, as most of the podcasts, we get some type of data-driven data. Well, data-driven data, we’ll work on my language here this morning. But we will start from the data side of things. And I figured we would take a look at market returns during election years. Maybe even getting a little more granular, taking a look at the month of the election actually took place and what the market has traditionally done, and then look a little bit at annualized returns during actual US presidential terms.
So, very, very data heavy today. And then we’ll finish up with really maybe what we think you should focus on and some of those things that you can control to put yourself in the best position going forward as you’re probably getting inundated with news headlines, and articles, and the like. And as with everything, when I go in and do some prep for these podcasts, I always like to take a look and just do a quick internet search to see what comes up over the topic that we’re going to be covering. And Walt, I’ll be frank, when I ran a couple searches, the headlines were not promising for what I was trying to relay as I think about how we structured it today. What I mean by that is articles such as how the presidential election could wreak havoc on your investment portfolio and titles all the like-
Walter Storholt:
A little hyperbole, maybe.
Tyler Emmerich:
… were right at the top. Yes. And so, of course, I had to go down, and I read through a couple of them. And there was a lot of scenarios ran through those articles and a lot of good information. But as you get down to the conclusion and you get down to really what the author’s trying to get across and some of the suggestions that they have for the reader, they were always the same. And it really got down to this old adage of making sure that those tried and true principles of portfolio management, such as diversification is the best remedy during times like this. And maybe more volatile years, like elections or any other thing like COVID we experienced in 2020, and just really sticking to your investing principles and getting down to it. So, it had to be worried, but a lot of those headlines were there to catch and get the readers in as they did with me.
I can completely understand when individuals come in on our meetings even and ask and say, “Hey, what are our opinions on the election and what are we doing from a portfolio standpoint to help navigate through the election year and the subsequent years after?” So, that’s really the premise and that’s what we’re going to get down into today. But before I dive into that data that I mentioned earlier, one thing from that article that had that wreak havoc on your investment portfolio title on the election, they brought up a really good point, where they actually tried to get into the psychological effects of the election, and as investors, how that comes through on your investing decisions.
So, elections provide a great deal of uncertainty, which can cause emotional and sometimes illogical behavior. Anxiety and fear over possible policy changes might drive investors to either make hurried investment decisions or withdraw from the market altogether. And that’s a lot of that driver in some of that increased volatility. But a lot of times when we’re making those decisions through that emotional lens, it can really put yourself in a tough situation and really provide some pretty negative outcomes, especially if you time it incorrectly or if you make one or two bad decisions there, trying to capitalize or trying to make those portfolio changes in light of what’s going on from an election standpoint.
And I thought that psychological aspect or lens, kind of looking through it was quite unique and wasn’t something that I was really thinking of as I was prepping for the podcast today. But I don’t want to lose sight of it and I thought it was worth bringing up as we dive into more of the data and the market returns in those election years.
Walter Storholt:
It makes sense when you think about it though, right? Psychological factors, emotions very high in finance, as we talk about all the time here on the show and in people’s decision-making. And boy, I think it’s an understatement probably to say it’s a factor in the politics side of things too. So, the fact that that would kind of have some similarities there, would be maybe something that would be obvious if you sat back and thought about it, but needed they pointed that out and it caught your eye.
Tyler Emmerich:
Yeah, absolutely. So, if we get down into what actually happens in the market during these election years, the data that I pulled this from goes back all the way into the mid 1920s, so quite a few election years incorporated in there, 24 to be exact. So, when we look back over those 24, the last 24 election years, what has the market done? And the proxy that we’re using for the market today is the S&P 500. That was the data that was most readily available and readily tracked for us to bring to light here. But the average return during a US election year was actually just over about 11.5% in the S&P 500, during an election year. Now, actually, the average return in the subsequent year after the election is a little bit less and it’s just over 10 and a half percent. So, about a 1% difference. So, about 11.5% return on average during the election year and about 10.5% return on average in the year after, is what the S&P 500 has done over those last 24 election years.
To kind of put that into perspective, where we sit today looking at the Russell 3000, which represents the vast majority of the investible market in the US. I think the last numbers were just over 98%. It’s up about 15.5% through yesterday. It’s actually a little bit better through the first six months here, of the year this year, which you put that into perspective on any other year. I’m curious, Walt, I know this is a pretty common stat and I know you’ll probably know it right off the top, but do you know what the S&P 500 traditionally averages per year?
Walter Storholt:
We’re right around 10% long-term, right?
Tyler Emmerich:
Yeah, you’re exactly right. So, we’re really right in line with historical averages across all years in the S&P 500. 10%’s right on the nose, and that’s the number that I would traditionally use to say, “Hey, what’s the market average from a return standpoint each year?” So, not much different there in an election year. And frankly, if we go back over the last 24 election years, only four of those election years, the S&P 500 was actually negative. So, the other 20 were positive return years from an election standpoint. So, what does this tell us from a high-level theme standpoint? I think first thing is it’s difficult to identify any systematic return patterns in an election year. So, said another way, it’s very hard for us or there’s no information that we can glean from historical performance, that we can use to make investing decisions in a year of an election.
Most of the data suggests that we’re falling in line with historical averages, both in election years and subsequent, the subsequent year after an election. And Market expectations associated with election outcomes are embedded in security prices, which I think is a big factor in this. So, what does that mean or what am I trying to say there? So, for a little bit of context, I think it’s helpful to think of the markets as a powerful information processing machine. So, the combined impact of millions of investors placing billions of dollars worth of trades each year, result in market prices that incorporate the collective expectations of those investors.
So, we think that with so much trading going on, the markets are fairly efficient, which makes it very difficult for any one individual to consistently out-guess what those market prices are or makes it pretty much darn near impossible, which is why we really want to be leaning back on some of those investing principles that we hear time and time again, such as diversification like the article had mentioned that I referenced a little bit earlier.
Walter Storholt:
So interesting to look at the things that both defy expectations and then meet expectations through some of that data. And kind of funny, ultimately, even though you could draw a few parallels here and there, there’s something that then undoes it on the other side. So, that’s why you’re saying we can’t really make grand predictions about what’s going to happen here.
Tyler Emmerich:
Sure. And that market expectations are already embedded in security prices. I think that can easily get lost in the shuffle, especially as you might see an article or hear something on the news and go, “Oh, boy, this company is going to do really well. It just won a contract with whoever. “Boy, maybe I should invest in that.” Well, you’re already too late to the game, because that information is really dissected and invested on essentially immediately with the technology that goes into investing nowadays, and some of the algorithms, and some of the trading that’s being done by computers. It’s very, very hard to capitalize off of that alpha. So, if you’ve already heard it on the news, Walt, well, you’re already too late to invest in it and that price has already been reflected on there.
Walter Storholt:
Isn’t that frustrating? I look at the data, Tyler, and so maybe this is an insight to what perhaps just the average investor would think or look at. And all right, the average return in any year, 10-ish percent, the average return after an election year, 10-ish percent, the average return during an election year, a little north of that, like you mentioned, 11.5%, somewhere in that range. Wow, you said we’re already between 15 and 16% this year. We got nowhere to go but down to get back to that average. And might make me think I should be pessimistic about the second half of the year to come back and meet that average. I know that’s not the right way to look at it, but that’s kind of where my automatic thought goes if you will.
Tyler Emmerich:
Well, it almost seemed logical, if you think about it. And well, you might go and say, “Well, think of all the headlines and think of what’s all going to come out between now and the actual election, and what that could potentially do to the market.” And a lot of that information, or at least the information that’s already been public and what the candidates are running on, that information is certainly for the most part baked into those prices and some of that uncertainty is reflected. Now, that doesn’t mean that there might be jumps or changes or some immediate volatility. I mean I think we’ve seen it back in the 2016 election, the market took a pretty big dip right after the election results were in, and then it had to bounce back as the market was digesting the information and settling in on where they thought where everything should be.
So, it can sometimes take a little bit of time. And by no means am I saying that we’re not going to have volatility or the market’s not going to move on certain headlines, I just am really trying to reiterate the point that it is extremely difficult for us to try to make any reasonable investing decisions based off of those headlines or based off of some of that information that comes in. And that it is assimilated, put into the market very, very quickly, and reflected into those market prices. And even as we get more granular, or excuse me, the market in election years traditionally follows historical trends. Okay, that’s great. Well, what about the actual month of the election that the election took place?
The chart that I’m thinking of here that represents this is got a lot of information on it and this big normal distribution curve, Walt, which is that big, I think of like a rollercoaster hill and then goes down on either side. And it kind of plots out each of those months trying to decide, well, hey, if a Republican wins or a Democrat wins, what’s the market performance in that particular month? And when you’re looking at that data, it becomes very, very clear and clean that, well, hey, there is no information that we can draw from this. It’s all normally distributed and well within typical month norms from a performance standpoint, even in an election month.
Again, the data that we’re using for this goes all the way back into the 1920s, so quite a few election months are put in there, 24, like we had mentioned before. And you plot each of those out, they’re pretty much normally distributed, just like most of the other data. So, what that tells us is that, again, even the election month, no matter who wins or loses, acts very similarly than any other month from a market perspective and falls generally within the same normal distribution.
Walter Storholt:
So, if somebody’s feeling really passionate about their guy making it through, not a whole lot that they can then glean from that from a performance or a prediction standpoint anyway?
Tyler Emmerich:
Correct. Yep, absolutely. Which is I think a nice little segue into, too, if we kind of look at just annualized returns. Again, we’re talking about the S&P 500 during those US presidential terms. So, annualized returns during US presidential terms and we take a look back. So, there’s been 16 presidents, going back to Hoover. And if we did a plot or a chart, we have a wonderful one that we have been showing during our client meetings here over the summer that lists out each of those presidential terms, going back to Hoover. And it really just shows an indication of, well, hey, how far was the market positive or how far was it negative during each of those presidential terms? And what was staggering to me is that over the last 16 presidents, only three presidential terms had negative stock market performance over those presidential terms. Only three times, which doesn’t seem like a whole lot.
So, of the three presidential terms that were actually negative, they all actually happened to be Republicans. But if you look at their actual term, a lot of times there’s a lot of good explanations as to what was going on and help painting that picture of, well, why did that happen? You take Bush for example. 2001, he started an office through 2009. Well, that was bookend by two very significant market changes. You had the dot-com bubble in the early 2000s, and then, of course, you had the great financial crisis that ended around 2009. So, you come in during the dot-com bubble and then you go out during the great financial crisis, and that’s going to have some impact. Two very, very significant downturns in the market that are certainly historical in their own, going back over the last 30 years or so. That’s going to be tough to have a market performance over that time period that was positive.
I mean we refer to it all the time from a US standpoint as the lost decade and the period of time where the US stock market had very, very poor performance, practically zero performance during that time period from a US standpoint. But Nixon was the other and Hoover was the other, which, of course, Hoover was The Great Depression and Nixon we were at war. So, there’s a lot of extenuating factors here that are going to certainly drive what the market does during a presidential term that we don’t want to lose sight of. But I think it’s important to note that, again, hey, going back over the last 16 presidents, only three of them the stock market went down during their presidential term.
Walter Storholt:
Interesting. So, do we just not care about the election at this point? Are we able to get away with that?
Tyler Emmerich:
It might seem that way with the way that I’ve been talking here through the podcast.
Walter Storholt:
You’re leading us up to it, but I feel like there’s a but in here somewhere.
Tyler Emmerich:
Yeah, there is. And I think it’s very important to realize that I’m not trying to get across the point that the election is not important, because it is extremely important. And whoever wins is absolutely going to affect our lives in a multitude of ways over their term. All I’m getting at is saying that it is very difficult, if not impossible, to make investment decisions based on who wins or loses the presidential election this year. Certainly, as they start passing legislation, whoever wins and that trickle-down effect, I mean then that is going to absolutely affect the market and that’s going to affect our daily lives. But again, it goes back to starting to make decisions off of what-if scenarios and what might happen, I think can get you in quite a bit of trouble. I think a much, much better approach would be really from an investment standpoint is to control what you can control.
So, if we look back through all the data here, and the election years and presidential terms tell us it’s hard to make any timing decisions based off of the election itself. Well, what can you control or what should you be focused on as we finish out the next six months here, and we go through our election, and then whoever wins the presidential election, what their policies are going to kind of bring down down the pike? So, there are a few things that pop up to mind. And the first one, going back to that article that I mentioned earlier in the podcast, was that I think now more than ever, it’s extremely important that you have a diversified portfolio.
That old adage of that you don’t want all your eggs in one basket, I think when we experience years where there might be a little bit more volatility or emotionally we might be feeling a little bit more strained and a little bit more nervousness on what might happen. Going back to that tried and true principle of being diversified, and spreading out your wealth across a multitude of assets, and doing that in a way that is thoughtful and diligent, is very, very important. And I’m not talking just about stocks. I mean you look at our portfolios here at True Wealth Design, we break them down into three buckets. We have stocks, we have traditional bonds, and then we have this diversifying assets as well.
And there’s diversifying assets or things that have a little bit different risk and return profiles than your traditional stock and bond and are added to the portfolio to limit some of the volatility and add diversification. So, we believe in diversification so much. I mean we’ve actually, in our process in portfolio construction, have a piece of that portfolio that is actually labeled, “Hey, diversifying” assets, which when we add them to our portfolios, we’re hoping smooths out the ride a little bit for us and then in turn adds a little bit of expected return. So, being diversified is probably priority number one.
Two, many many of our listeners here, Walt, are retirees or heading into retirement and income is on their minds. Where are they going to get their money from in retirement? How are their distributions going to come? And during times where we might have some expanded volatility or some bigger ups and downs, and the markets sit another way, I think it becomes that much more important to understand, well, if you do need money, where are you going to go to get that? I think back to March of 2020 when we had COVID and the stock market dropped by about 30% in one month. When we were meeting with families over that time period, a lot of our conversations were around this idea of runway in your portfolio.
And that has everything to do with that income and where their money is going to come from. And what we meant by runway and what we were trying to relay to the clients and families that we worked with was saying, “Hey, we understand that the market has taken a pretty big dive right now and you might be living off of your portfolio in retirement, but we’re pulling from assets that are not down nearly as much as the stocks inside of your portfolio. And we’ve set aside X amount to make sure that those spending needs are covered for a number of years.” Some families had almost double-digit years of runway before they would actually have to sell out of any negative performing stocks during that time period.
So, anytime that I start thinking about, okay, hey, we’re having a year that’s going to have potentially some more volatility, a lot of emotions involved, you got to live in retirement, you got to know where some of that money’s going to come from. Having a plan in place to be able to navigate that volatility when it’s actually happening, I think is very, very important and provides a lot of that foundational support to say, “Hey, all right, if I see that my account’s down or we experienced some volatility in the market here recently, I’m okay because I’m pulling from other pieces of my pie, are using some of those other investments that are maybe a little bit less volatile or maybe not down quite as much to pull from and live off of and have enough time to recoup some of those losses.”
It all goes back to that old adage of the sequence of return risk. Walt, I know we’ve talked about that multiple times here inside the portfolio. But I think when we’re talking about things like election years and their impact on the market, understanding and having a plan in place will pay huge dividends when you’re in the thick of it, trying to make decisions that are best for you and in the long run.
Walter Storholt:
And last but not least, as we talk about things that you can control, you can also control at least a little bit where you’re getting your advice from and your guidance. Are you getting it from some of these articles that have outlandish headlines to hook you in, and get you to read them, and engage with them or just try to annoy you when it comes to politics? There’s all sorts of different biases, and motivations, and manipulations going on out there. And so, is that where you’re going to take your guidance and advice? Are you going to take it from more data-driven sources, and from people who have been there and done that, and are able to look at history, and what’s ahead, and help make informed decisions about your finances and money? And that’s where it comes down to talking to a financial planner who knows how to keep the emotions in check and make logical, good financial decisions about your future.
And if you would like to talk with Tyler Emrick and the great team at True Wealth Design, Kevin Kroskey or another great member of the team, you can get in touch very easily by going to truewealthdesign.com. Click the Are We Right for You Button to schedule a 15-minute call with an experienced advisor. Again, go to truewealthdesign.com, click Are We Right for You. We’ve linked to that in the description of today’s show as well, so you can find it easily. You can also call 855-TWD-PLAN and set up your conversation that way as well. 855-TWD-PLAN. Tyler, great breakdown and you made it through without many coughs, my friends, so well done. [inaudible 00:26:36].
Tyler Emmerich:
Not too bad. The editing team, that’s not going to be too bad on them today. And I know we’re winding down, but Walt, you brought up a really good point. And I just want to make sure I bring it up again and maybe we emphasize that a little bit, but this whole idea of having a financial planner or having someone that you can go to talk about these things. I think now more than ever, it’s easy to get inundated with certain headlines that are trying to catch your attention, that are trying to get you to do something else or move in another direction. And having someone on your team that you can talk to with these questions and bring them up in a way that’s just like, “Hey, what should we do? I’m feeling this way about the election and worried about its impact on my portfolio, what are we doing or how should we approach that?” And having someone that you can really bring those ideas to and bring those concerns up with.
I’m having so many conversations like that over the course of this past summer. We’ve had many, I’m sure I’m going to have many more heading into the fall as we bring in the next segment of families that are getting ready to come in and meet with us. But I think that is extremely, extremely important. And as your advisor’s talking you through a situation like that, I think it’ll give you quite a bit of insight into, well, the way that that individual or that team is making decisions for you. And are they doing it in a very process-oriented way that is more data-driven, that’s going to put you in a situation to get better outcomes for you and your family? Or are they getting caught up into the headlines as well, and really making portfolio decisions based off what ifs, and trying to make rash decisions or quick decisions based off emotion, and not relying on that process to go in and put you in the best position going forward?
So, make sure that you’re talking with a financial advisor. And if you don’t have someone that you feel like can communicate that clearly, and articulate that, and get you to a place to where you feel comfortable, well then, hey, that’s where maybe meeting with another advisor or certainly anyone here at the team of True Wealth would be happy to sit down with you, and give you our opinions, and make sure that we understand or make sure that you understand how those opinions fit into your situation to put you in the best position going forward.
Walter Storholt:
Yeah, great final thoughts there, Tyler. Again, go to truewealthdesign.com if you want to set up that time to meet with an advisor on the True Wealth team. And we have linked to that and put the phone number in the description of today’s show, too. Tyler, thanks for all the help. I hope you feel better. And I know you’ll be on the mend and back to feeling good before our next episode.
Tyler Emmerich:
Yeah, sounds good, Walt.
Walter Storholt:
All right, have a great week and we will talk to you soon. That’s Tyler. I’m Walter. Thanks for joining us. We’ll see you next time right back here on Retire Smarter. Information provided is for informational purposes only and does not constitute investment, tax or legal advice. Information is obtained from sources that are deemed to be reliable, but their accurateness and completeness cannot be guaranteed. All performance reference is historical and not an indication of future results. Benchmark indices are hypothetical and do not include any investment fees.
