By Lauren Goodwin, CFA, Economist and Multi-Asset Portfolio Strategist, New York Life Investment Management
There are now less than 75 days to the U.S. Presidential and Congressional elections. As Democratic and Republican conventions move into the rear-view mirror, we expect politics and polling to become front and center to financial media.
There are always risks to investing, but the next few months could feel overwhelming for investors. A global pandemic, soaring valuations, U.S.-China tensions, and an election to top it off – what’s an investor to do?
To answer this question, we surveyed 100 years’ worth of U.S. elections to provide three key insights:
1. Expect short-term volatility
Markets do not like uncertainty, particularly around structural policy issues, such as taxes or regulation. As a result, investors should expect market volatility leading up to the election. Equity market volatility persists, on average, until results are announced.
Market volatility tends to persist until electoral questions are resolved
Average VIX Index performance during election years, since the Index’s creation in 1990
Sources: New York Life Investments Multi-Asset Solutions; Bloomberg Finance LP; Chicago Board Options Exchange; 8/13/20. The Chicago Board Options Exchange’s CBOE Volatility Index (VIX) is a popular measure of the stock market’s expectation of volatility based on S&P 500 index options. Past performance is not indicative of future results. An investment cannot be made in an index.
This volatility, however, tends to resolve in short form. Our review of the last 100 years’ worth of elections shows that equity markets are just as likely to increase in the 90 days leading up to an election (12 elections, average of 6.6% return) as down (11 elections, -4.1% average return). Taking a step back to consider election years as a whole, equity returns have averaged 7.1% compared to 7.9% in non-election years.
2. Focus on policy, not politics
It is real policy change, or the likelihood thereof, that shapes the investment environment—not short-term political dynamics. Over months and years, elections have only mattered to the extent that they impacted factors contributing to economic or market conditions.
The factors contributing to real economic growth and full employment will be the same factors driving sector performance, earnings growth, and overall market returns.
In the next 6-12 months, we expect COVID-19 and the policies designed to combat it will be center stage for investors.
3. Stay invested
There are always risks to investing, and election years are no exception. Over several years, equities tend to move higher regardless of who is in the White House. In fact, equity returns are more balanced than one might expect. Our research of the past 100 years of elections found that equity markets rose 4.6% per year (net of inflation) for the average presidency, 5.0% per year under a Democratic president, and 4.2% per year under a Republican president.
Sources: New York Life Investments Multi-Asset Solutions, Shiller, 8/13/20. Given the high volatility of stock markets, the difference between Democratic and Republican presidencies is not statistically significant.
To us, this demonstrates that other powerful factors—such as the economic environment, technology, and investor risk appetite—are more important than the party and ideological leanings of the administration in power. In addition, we expect structural market factors—such as “lower for longer” interest rates and low bond yields—to contribute to equity market attractiveness over a longer time horizon.
Elections matter insofar as they shape the economic and investment environments, but they do not do so in vacuum.
This material represents an assessment of the market environment as at a specific date; is subject to change; and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding any funds or any particular issuer/security. The strategies discussed are strictly for illustrative and educational purposes and are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. There is no guarantee that any strategies discussed will be effective.
Any forward-looking statements are based on a number of assumptions concerning future events and although we believe the sources used are reliable, the information contained in these materials has not been independently verified and its accuracy is not guaranteed. In addition, there is no guarantee that market expectations will be achieved.
This material contains general information only and does not take into account an individual’s financial circumstances. This information should not be relied upon as a primary basis for an investment decision. Rather, an assessment should be made as to whether the information is appropriate in individual circumstances and consideration should be given to talking to a financial advisor before making an investment decision.
“New York Life Investments” is both a service mark, and the common trade name, of certain investment advisors affiliated with New York Life Insurance Company. Securities distributed by NYLIFE Distributors LLC, 30 Hudson Street, Jersey City, NJ 07302, a wholly owned subsidiary of New York Life Insurance Company.