It’s an election year.
As a result, it’s common for retirement investors to believe that the market MUST be in for a wild ride.
But is that true?
Over the last 100 years, how have markets behaved during election years?
What have been the best and worst returns?
How has the market performed during every 4-year presidential term since 1929?
And is it “different this time?”
To help retirement savers invest wisely during this period of heightened uncertainty, I’m answering these questions (and more).
Want My “Investing During an Election Year” Charts?
Join the Stay Wealthy newsletter by clicking here.
This week and next, I’ll be sending the 12-page PDF to all newsletter readers 😊
Need Tax + Retirement Planning Help?
We specialize in helping people aged 50+ lower taxes, invest smarter, and (safely) create a retirement paycheck.
Our Free Retirement Assessment™ will answer your BIG questions and help you properly evaluate our firm.
Click the banner below to learn more. 👇
How to Listen to Today’s Episode
- How Have US Stocks Behaved During an Election Month [DFA]
- Don’t Mix Politics With Your Portfolio [Ben Carlson]
- Historical Performance Under Various Political Scenarios [CNBC]
- Obama’s Radicalism is Killing the Dow Jones [WSJ]
- Trump to Lead Us Into a Global Recession [NY Times-2016]
How to Invest During an Election Year
Taylor Schulte: Welcome to the Stay Wealthy Podcast. I'm your host, Taylor Schulte, and today I’m discussing investing during an election year.
Specifically, over the last 100 years, how have markets behaved during election years?
What have been the best and worst returns for the market during election years?
Even more, how has the market performed during every 4-year presidential term and what lessons can we draw from the data?
If you’re interested in the charts and data I’m referencing today, be sure you’re on the Stay Wealthy newsletter list. I’ve put everything together in a nice 12-page PDF and I’ll be sharing it with newsletter readers this week and next.
To join the newsletter, just head to youstaywealthy.com/email. That’s youstaywealthy.com/email.
I’ll also provide a link in your podcast app as well as the show notes for today which can be found by going to youstaywealthy.com/211.
It’s not uncommon for investors to believe that because it's an election year, the stock market must be in for a wild ride. Even more, some investors suggest that if the party they favor wins the election, it's going to be good for the markets, but if the other party wins, it's going to tank them.
I'm not going to pretend to be able to predict the future today but looking back at almost 100 years of data can certainly be helpful in making informed decisions with our money and our investments. Or, at the very least, help to reinforce our philosophy and approach to investing.
Let’s dive into the data.
Since 1928, as far back as this data set goes, we've had 24 election years. The first election year in 1928 was Hoover vs Smith, and the most recent, of course, was Trump/Biden in 2020.
Believe it or not, out of these 24 election years going all the way back to 1928, the U.S. stock market only experienced a negative return during four of them. Said another way, going back to 1928, the U.S. stock market has produced positive returns during an election year 83% of the time. 83% of the time!
And we’re not talking about slightly positive returns here – the average return of the S&P 500 during every election year during this time period was 11.5%.
Ok, but maybe the subsequent year (i.e., the year after an election year) is when the dust finally settles and things get ugly. And, yes, while 40% of years subsequent to an election year have produced negative returns, the U.S. stock market has still produced an average annual return of 10.7% during the 24 years following an election year. You definitely had a few more storms to weather, but investors, on average, still came out with slightly higher returns in the subsequent year than the long-term historical average for the US stock market.
In case you’re wondering, the worst-performing election year was Obama/Mccain in 2008. And that shouldn’t be totally surprising given that we were in the middle of the Great Financial Crisis at the time, resulting in a negative 37% return for U.S. stocks that year.
The best-performing election year, funny enough, was the very first election in the data set I’m using, and that was Hoover vs Smith in 1928, when the S&P 500 produced a positive return of 44%, which ironically, was right as the worst economic downturn in history (The Great Depression) was about to unfold.
So, we’ve taken a few lumps over the last 24 election years, but, historically, we’ve witnessed positive returns in the U.S. stock market 83% of the time. And the average annual return during those 24 years was slightly higher than the long-term historical average for the U.S. stock market. Pretty encouraging.
But an election year, or even the subsequent year, is just one 12-month time period, anything can happen in 12 months. So, what about market returns for the 4-year terms served by presidents?
Well, just like election years, since 1928, there have been 24 four-year presidential terms, some of those of course repeat terms by the incumbent. And, oddly enough, just like election years, the market only ended in negative territory in four of those 24 terms. In other words, only 17% of four-year presidential terms have resulted in negative total returns for U.S. stocks.
Those four are Hoover from 1929-1932, Roosevelt from 1937-1940, and then both of George W. Bush's terms in the early 2000s.
When you look at the charts I’m sharing with newsletter readers, Hoover’s term from 1929 - 1932 is the clear outlier, with the U.S. stock market returning a negative 64% return for the entire four-year time period.
To put those losses into perspective, if you invested $100,000 at the beginning of Hoover’s term and reinvested all dividends and stayed the course, you would have been staring at $36,000 by the end of his four years. And you thought the 08/09 crisis was bad, just an absolutely brutal time period for the markets and economy.
Right behind Hoover, Franklin D. Roosevelt's second term from 1937-1940 was the second worst performance for a presidential term, with the U.S. stock market producing a total negative return of 23%.
Finally, George W. Bush’s first term from 01-04, was essentially a flat market, with the U.S. stock market producing a negative total return of 2%. His second term, on the other hand, extended into the lost decade and bled into the 2008 financial crisis, producing a total negative return of about 19% during the four-year term that began in 05 and ended in 08.
So, from the beginning of Bush’s first term to the end of his second term – eight years – the U.S. stock market had a total negative return of 21%. However, similar to the episode I published on investing during the lost decade, it would be incredibly rare for a smart, prudent, diversified investor to have 100% of their nest egg invested in U.S. stocks.
If an investor just sprinkled in some basic diversification, the return numbers almost get flipped on their head. For example, a three-fund portfolio comprised of 40% U.S stocks, 20% International stocks, and 40% intermediate-term treasury bonds, had a total positive return of 15% through both of Bush’s terms from 2001 to 2008. It’s truly amazing what a little diversification can do to a portfolio's long-term returns, especially when we go through difficult, strange time periods like the early 2000s.
Ok, so, outside of those four presidential terms, all other four-year periods ended in positive territory for U.S. stocks, with Roosevelt's first term from 1933-1936 producing the highest total return of 200%. The average annual return for all presidential terms since 1929 is 10.28%, which, of course, represents the long-term historical average for the stock market for the last 95 years.
Now, while most four-year presidential terms ended in positive territory, one interesting and important fact to hold onto is that every single president in history experienced significant drawdowns under their watch. Republicans, Democrats, and everyone in between oversaw a double-digit drawdown in the U.S. stock market.
In fact, the average stock market drawdown – (i.e., an intra-year drop in the market) – the average stock market drawdown during all four-year presidential terms since 1929 has been a drop of 30%.
So, just because a presidential term ended with healthy positive returns doesn't mean it was a smooth, easy ride for U.S. stock investors. Similarly, just because a presidential term ended with negative returns, doesn’t necessarily mean it was a four-year disaster for the markets and investors.
For some presidents, the timing of when they took and left office worked out very well in their favor, and for others, not so much. There's an element of luck at play here that’s hard to ignore, especially since policy decisions affect the economy with a lag.
As I’ve discussed here on the show before, the stock market is not the economy…and we may not see or feel the effect of something (positive or negative) that the Biden administration put into place for years to come. It takes time for these major changes (or blunders) to work their way through the economy and the markets. And sometimes (or maybe most of the time), the wrong party or person gets the blame for negative results when we’re digging through historical data.
Also, let’s not forget the Fed and their role in the economy, monetary policy, and financial markets. While there may be some influence by the white house, the Federal Reserve operates independently, and can positively or negatively impact the economy and the financial markets during the current even future president's term.
If we’re looking for any reliable trend in the data outside of long-term investors benefitting from ignoring short-term noise, it’s that the market likes when no single political party has too much control or sway, hence why we see stronger historical stock market performance when Congress is split.
As Ryan Detrick put it,
“markets tend to like checks and balances.”
It’s not fun or exciting, but the truth is, we truly don’t know what the market will deliver this year, the next four years, or even the next decade. Even with the election results in our hands, predicting the future is just about impossible. When Trump was elected in 2016, the New York times said, quote,
“Under any circumstances, putting an irresponsible, ignorant man who takes his advice from all the wrong people in charge of the nation with the world’s most important economy would be very bad news. We are looking at a global recession, with no end in sight.”
Mark Cuban, at that time, was also quoted saying the market would crash if Trump won the white house. Despite these headlines that you may or may not have agreed with at the time, the U.S. stock market was up 81% during Trump's 4-year term and there were more than 130 new all-time highs on the S&P 500.
Similarly, in 2009, the Wall Street Journal published a story saying that
“Obama’s radicalism is killing the Dow Jones.”
Instead, a 10-year bull market was born, and similar to Trump, the stock market hit over 130 new all-time highs during his tenure.
I’m not suggesting that either president in these examples were perfect or that they didn’t do something that had (or will have) a negative impact on the economy and markets. My point is simply that it’s just about impossible to predict what the next four years will produce, let alone what happens this year as the election unfolds.
What we can predict with quite a bit of certainty is that it’s likely not going to be a smooth ride. It never is. Markets are volatile and unpredictable, and every presidential term throughout history has included sizeable drawdowns in the market. Remember, on average, the stock market has a 10% drawdown about once every year. Republican, Democrat, good president, bad president…a 10% drawdown every 12 months should be expected and built into a long-term plan and should not come as a surprise to equity investors.
If you’re thinking of making significant changes to your portfolio ahead of this year's election, consider answering these great questions posed by investment writer, Ben Carlson.
If I sell out of the market because of the President, does that mean I have to stay out of the market until a new President takes over?
If I sell out of the market because of the President and the stock market moves higher, will I buy back in or continue to sit on the sidelines?
If I sell out of the market because of the President and the stock market crashes will I buy in at lower prices or continue to sit it out based on my political beliefs?
If I sell out of the market because of the President and things don’t turn out as bad as I originally thought, how will I know I was wrong?
It’s hard enough to manage the emotions of investing our hard-earned money. Letting politics influence your money decisions will make the task even more difficult and likely more stressful.
When I bring up this topic – when politics or election years enter the investing discussion – a common response or argument against staying the course and ignoring the headlines is, “yeah, Taylor, I get it, the historical data is compelling and optimistic, but this time is different. The things we're up against today, the candidates we have to choose from, the threats our country is dealing with, the unsolved challenges that desperately need a proper solution, are wildly different, and consequences are much more extreme, than they were 25 years or 50+ years ago.”
To which I say, well, it’s always different. Or, at the very least, it always feels different. And, in the moment, it typically feels scarier and more extreme than prior moments in history. History has a strange way of repeating itself, but the recurring themes and events show up in new and different ways.
We just combed through almost 100 years of market returns, and as long as investors stayed the course and maintained a diversified portfolio for time periods as short as 8 years, they experienced positive results. But think about all the major, historical events and storms that investors had to weather during the last 100 years to achieve a positive investment outcome. The events that made them feel like “this time is different and more extreme.”
Not just the Great Depression and World War II, but we also had the Korean War in the early fifties, the Vietnam War in the late sixties, massive inflation and sky-high interest rates in the 70s and 80s eighties, the tech bust and boom in the nineties, 9/11, the second worst recession in history, and a global pandemic.
And those are just the headlines…there were hundreds, if not thousands, of other events that caused worry and stress and anxiety about the direction of the economy and the markets and the hard-earned money being invested fund financial and retirement goals.
There have been, and always will be, major events that will attempt to influence people to make irrational changes to their plan and veer off course. And although things might be (or at least) feel different today, I just don't see any evidence to support making a meaningful change to a long-term financial plan in response to these feelings or in response to it being an election year or in response to who we think might take office next.
And, as always, yes, even those who are in retirement have a long-term financial plan to commit to and protect. You might spend more time in retirement than as a working professional, and you need your money and investments to be working for you properly over the next 20, 30, 40 years to combat inflation and generate a reliable retirement paycheck.
Most people can’t afford to be jumping in and out of the market just because they have a hunch about a political event or what a presidential candidate might do to the financial markets. If you play that game, on average, you're going to be wrong, and your financial plan is going to suffer as a result.
Once again, I’ll be sending the 12–page PDF I put together with Stay Wealthy newsletter readers this week and next. The PDF includes updated data and charts on investing during an election year and includes data sets on international stocks, bonds, as well as the U.S. markets. To join the Stay Wealthy newsletter, just go to youstaywealthy.com/email.
And to grab the show notes for today’s episodes, head over to youstaywealthy.com/211.
Thank you, as always, for listening and I’ll see you back here next week.
Episode Disclaimer: This podcast is for informational and entertainment purposes only and should not be relied upon as a basis for investment decisions. This podcast is not engaged in rendering legal, financial, or other professional services.