By SJS Senior Client Portfolio Manager Tom Kelly, CFA.
We at SJS are constantly discussing the markets – how they’ve been doing, where they’re going, what we’re doing about it. Recently, the conversations have surrounded the upcoming election and our views on how one particular outcome might affect the markets. While it makes for lively discussion, what is more interesting is looking at the actual returns of the S&P 500 during election years and subsequent years that follow.
Source: S&P 500 data. In US dollars. See Important Disclosure Information.
Based on our research such as the graph above, there are no noticeable or statistical patterns on the given year or outcome. It doesn’t seem to matter if the results are expected or unexpected, or whether an elephant or donkey inhabits 1600 Pennsylvania Avenue. On average, stock market returns (as measured by the S&P 500) have been positive both in election years and the year following (and every year for that matter!). What about predicting a subsequent year based on the election year results? Don’t count on that either. The correlation between those two is -0.32 (values at or close to zero imply weak or no relationship), based on the same S&P 500 data used for the graph above.
We dug even further into the data to see if there was discernible trepidation in the 6 months leading up to new presidents, or the November-December months that coincide with election years, as shown in the graph below. Surprisingly, the annualized average return in July-December during election years was 18.6%, compared to 10.6% during non-election years. The months of November and December were great times to be invested in the markets regardless of an election, with the annualized average return for those two months being 19.4% during election years vs. 19.8% during non-election years. We believe your portfolio allocation and the discipline to stick to it are far more important to your investment results than who sits in the White House.
Source: S&P 500 data. In US dollars. See Important Disclosure Information.
The big takeaways from our research are consistent with the MarketPlus Investing’s core fundamentals, primarily that speculating is futile and the stock market rewards investors over the long term. Regardless of the presidential party, policy changes, and the unknown events, we recommend sticking with your MarketPlus designed portfolio to help you reach your goals.
If you have any questions on how the upcoming election may impact your portfolio, please reach out to us. We are always here to listen and assist.
Source: Dimensional Fund Advisors. In US dollars. Growth of wealth shows the growth of a hypothetical investment of $100 in the securities in the Fama / French US Total Market Research Index. See Important Disclosure Information.
Important Disclosure Information and Sources
There is no guarantee investment strategies will be successful. Past performance is no guarantee of future results. Diversification neither assures a profit nor guarantees against a loss in a declining market.
Hyperlinks to third-party information are provided as a convenience and we disclaim any responsibility for information, services or products found on websites or other information linked hereto.
Indices are not available for direct investment. Their performance does not reflect the expenses associated with management of an actual portfolio. In US dollars. The index performance figures assume the reinvestment of all income, including dividends and capital gains. The performance of the indices was obtained from published sources believed to be reliable but which are not warranted as to accuracy or completeness.
The S&P 500 Index is a free float-adjusted market-capitalization-weighted index of 500 of the largest publicly traded companies in the United States. Source: S&P data © 2020 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved.
The growth of wealth chart begins with the start of the first full presidential term (March 4, 1929) for which Fama / French Total US Market Research Index data is available and ends on June 30, 2020. Data presented in the growth of wealth chart is hypothetical and assumes reinvestment of income and no transaction costs or taxes. The chart is for illustrative purposes only and is not indicative of any investment.
The Fama / French Total US Market Research Index is a value-weighed US market index is constructed every month, using all issues listed on the NYSE, AMEX, or Nasdaq with available outstanding shares and valid prices for that month and the month before. Exclusions: American depositary receipts. Sources: CRSP for value-weighted US market return. Rebalancing: Monthly. Dividends: Reinvested in the paying company until the portfolio is rebalanced.