Clarity for Investors in an Election Year
As you can imagine, we have been addressing many questions around how the markets will react to a "Blue Wave" or a "Trump Train" this November. There are many variables that can affect the markets in the short run. However, history may be our guide in understanding the long-term effects of this election. I recently read a white paper from Capital Group/American Funds that illustrated the market reactions since 1936 during presidential cycles in 5 charts. Click here to view this whitepaper.
3 Investing Ideas for the Election Year
The most important takeaways I found from the article were:
- Since 1933 there is only a marginal difference in stock market returns between having a unified government (all 3 houses the same) or a split congress. This is illustrated in chart 2.
- In chart 4 you can see that since 1992, net fund flows favor money market funds over equity funds almost 2 to 1 during a presidential election year. This demonstrates a conservative positioning leading up to an election. However, in the year that follows an election year, the net flow flips in favor of equity funds by almost 4.5 to 1. The moral of the story: buy when others are selling and sell when others are buying.
- Finally chart 5 illustrates the average 4-year return in the last 22 presidential election cycles since 1936. Staying invested provided the best outcome in 14 out of 22 cycles. Adding money through monthly contributions such as a 401k was never a bad idea as it resulted in the worst outcome 0 out of 22 times. Finally, "sitting on the sidelines" rarely pays off for investors as it resulted in the worst outcome 16 out of 22 times.
The point I want to drive home is that the election cycle is short lived and investing for the long run is always a better investment strategy than speculating on the outcome of an election.