In this month’s edition of “Money Matters,” Scott talks about how presidential election years can initially have a negative effect on the stock market, but explains how the market tends to bounce back and the importance of staying invested during an election year.

Money Matters: The Key to Positive Returns During Election Years? Stay Invested

0:00:00.0 CJ: The WTIP is pleased to bring you another edition of Money Matters, a monthly feature intended to help us understand more about managing our finances. Scott Oeth is a certified financial planner and adjunct professor, and he works with many individuals and has taught retirement planning and wealth management strategies to hundreds of financial professionals. And Scott's joining us now by phone. Good morning, Scott.

0:00:24.9 Scott Oeth: Good morning, CJ.

0:00:26.5 CJ: Nice to chat with you again. So timely topic here. There's been so much talk about the upcoming presidential election and politics right now, so I was wondering how have markets reacted to elections in the past?

0:00:46.1 SO: Yeah. Are you ready for this, CJ? Just dive into this.

0:00:48.5 CJ: Absolutely.

0:00:51.1 CJ: Okay. Yes, I can do it. I can do it.

0:00:53.3 SO: Yep. Yep. So, this, over the course of my career, running over several decades, this comes up every four years, and I get lots of questions, lots of clients’ concerns, people wondering, on both sides, everyone thinks, the other guys are going to ruin everything, and their party is going to be the savior. So, I've put a lot of time into this. I've pulled together quite a bit of research, and hopefully I have some good data points to share here, but, of course, our usual disclaimer, nothing here is supposed to be specific advice. I know nothing about any listener's own individual situation, so, do your own research, and I really recommend seeking professional guidance. But CJ, I guess to your first question, here's one thing we know: markets hate uncertainty.

0:01:36.0 SO: The pattern has been that leading up to the election, this time of year—this year actually may be a little bit unusual because returns have been very good—but typically, pre-election, there's volatility, there's uncertainty, and markets don't like that, so returns are poor. Then, after the election, boom, things take off. So, there are some interesting data points. Capital Group, a really large asset manager, took a look at 90 years of investment data, across 23 election cycles from 1932 until 2023. They found out the primary seasons tend to be volatile, but markets bounce back strongly as we talked about, and they said stocks have returned 11.3% in the 12 years following primaries compared to 5.7% in similar non-election years. So, very strong returns following the primaries. Hartford Funds is another very large asset manager, and they did research on this with a very interesting piece that says presidential years have been good for investors.

0:02:41.2 SO: I think the sense is, I hear from a lot of people and talk over a cup of coffee or people asking me questions is, “Oh, this must be terrible. I want to get out of the market.” There's this uncertainty, but presidential years have actually been good, from 1928 until 2023. The S&P 500 big index of U.S. company stocks over all these years, this entire time period, 10.01% is an average annual return, which is very good, but during presidential election years, the average returns are 11.5%.

0:03:15.6 CJ: Interesting.

0:03:16.7 SO: So much better return, and in presidential election years, they show that 83% of the time, stocks have had a positive return. Then, the piece from Capital Group, says that in presidential election years, in the first half of the year, on average, stocks have averaged 2.78% return versus 9.34% in the second half. So, we don't know how this year's going to unfold. Like I say, it's actually been a strong start to the year, in general. As we've talked about so many times, CJ, a lot of the artificial intelligence and technology-type companies have really driven big results, but the pattern has definitely been strong returns, in general, in presidential election years in particular in the second half of the year.

0:04:00.1 CJ: I just find it interesting, and I always have because I'm such a, you know nothing when it comes to finances, that whatever side you're on politically thinking that what you're doing is going to have a big and an immediate effect on the economy is kind of like for me, it's like you're on the Titanic. Everything that happens, happens slowly, right? Not that it's going to sink. I didn't mean that, but that a big ship, everything goes slowly. You can put all this stuff into effect and then it takes a while for it to actually materialize. And then by that time, the other party's in office and they're benefiting from whatever happened previously. So, it's like it is so sort of frustrating for me to listen to all these pundits, political guys, saying, “Oh, yeah, I've got the answer.”

0:05:00.3 SO: I couldn't agree more, CJ. I think you're dead on. Since it's been for a long time, I think, I mean, first of all, it's not the president's job to micromanage the economy. Even if they, as much as they try, you have business cycles and you look at the broad swath of the economy. You've got hundreds of thousands of people waking up every morning going to work, doing their best to provide great services and products and drive their companies forward. So, I think, in general, presidents get too much credit and also too much blame for these things. I think, even if their policies are starting to turn that ship a little bit, one way or the other, it's often a lagging effect.

0:05:41.5 SO: I think we've seen several times that a president comes into office and what they're dealing with is all of a sudden, from an investment standpoint, an asset bubble that's collapsed. Well, where'd that come from? That was, several years of runup before or an economic cycle that might be due to previous tax policies or stimulus or whatever. So, I think you're absolutely right. I mean, the design of our system is self-correcting. Maybe if one party completely had control and stayed in power for 20 years, you might really see something moving directionally, but that's not the way it works.

0:06:16.7 CJ: Right, exactly. Sort of ping ponging back and forth. Alright, well are there any moves that people should be considering with their investments right now since we are in an election cycle?

0:06:30.5 SO: Well, yes. I think one thing to watch out for—now, as a reminder, I know nothing about the folks’ individual situations’—but you need to think through what really makes sense for your plan. One thing we can see when we look at the numbers is in election years, people pour money into cash and money market funds because they're concerned. So, we can actually look at data from fund flows, and you can see, historically, lots of money pouring into money market funds and much less into equity or stock funds where they're investing in companies and then it reverses. If we look at those numbers we talked about at the beginning, if anything, it probably should be the other way around. So, the best way to invest in election years has really been staying on the sidelines and staying invested.

0:07:21.6 SO: There's another piece again, or another bit of research on that Capital Group piece. Same thing, 23 election cycles, and they found that investors who stayed fully invested during those 23 cycles had the best outcome 14 out of 23 cycles versus those who sat on the sidelines had the worst outcome 17 out of 23 cycles.

0:07:44.4 CJ: Because they're always reacting.

0:07:47.4 SO: Yeah, yeah, they're trying to catch up. They're trying to chase returns, but, really, when the market moves, it tends to move pretty quickly. The idea that I've heard so many times as well is that I just want to be more comfortable. I'd like to put my money in the bank, or let's put it in the money market fund, and we'll get back in when things look better. Well, I hate to say it. The price you pay to get those really attractive long-term returns that we're talking about, 10%, 11%, the price you pay is dealing with that discomfort and uncertainty.

0:08:16.1 SO: If you wait until things look better, you're buying in on top of someone else's returns. If we look back, CJ, just even over the last 10 years, I mean, look, we had three different presidents, two different parties. We had global pandemic. There's been wars, there's been terrible political strife. We've had soaring inflation. You and I have talked about soaring national debt. A sequence of events that no one perfectly predicted. I'm confident of that, and if they had, would they have invested in the market? I don't know if even I would've, and I think there's one thing I'm good at: it's having long-term conviction. But if you laid that all out, people would say, heck no, I'm not putting my money at risk in volatile investments.

0:09:00.5 SO: But guess what: we've averaged the last 10 years a very good return of over 12.5%. So, who saw that coming? If you did see it coming and you knew the story, boy, it would've really taken nerves of steel to stay in the market. So, being invested over the long run, I think I really try and discourage people from making major moves based on the election cycles. You've got folks on both sides doing their best to muck-rake to stir up emotions, to make the other people seem like they're going to just ruin everything and to try and capture votes. I think what really makes sense is those timeless principles to develop an appropriate investment allocation that matches your financial planning goals. It can make a lot of sense to get a second opinion—professional help—here and be diversified, watch your expenses, be mindful of taxes, and really just that behavioral, that investor temperament, sticking with the plan. So, design a plan that will let you ride through rocky market periods. You know? Yes, you may need to and want to have safety money, cash in the bank, things like certificates deposit, money market funds, bonds. I'm not saying those are bad at all. What I'm saying is you probably don't want to shift your long-term money, all of it into those holdings because you'll probably miss attractive returns.

0:10:30.1 CJ: Indeed. Scott, thank you so much for giving us a little heads up on the markets and election cycles. Really appreciate it.

0:10:38.4 SO: Thanks, CJ.