What to Expect When Investing During an Election Year

2024, as you all know, is an election year. And not just any election year, but what could be one of the most controversial election years in our nation's history. And given the constant influx of media hype and attention around everything, such as geopolitical tension, political dispersion within the U.S., inequality, inflation, government spending, and the nations screaming debt levels, the collapse of the U.S. dollar, student debt, and the uncertainty of Social Security, all while the stock market has continued to make new highs. Investors and everyday people saving for retirement are left to wonder what's going to happen with my investments.

Hello, and welcome back to the Retired-ish podcast. I'm your host, Cameron Valadez, certified financial planner and enrolled agent. It's easy to surmise that given everything going on in the world today, something is bound to crack, surprising us, confusing us, and leaving us financially destitute. While it is not at all unusual to have this level of uncertainty at any given moment in time, this sort of thinking or mindset, let's call it, has greatly intensified this year in 2024, largely due to the fact that we have a very controversial presidential election on the horizon.

Now, I'm not here to share a biased opinion on political matters like an evening talk show and waste your time. I'm here to give you an idea of how elections can impact your investments and how to think about them from a long-term investing standpoint. I'm also not here to say that elections don't matter and not to worry about them because they absolutely do matter. There have been stretches that span multiple presidencies which produced very lackluster economic results, only then to be catapulted into expansion.

[00:02:17]:
So think Johnson all the way to Reagan, for example, and there will likely be more. Although every election poses new policies and issues to discuss, there will always be uncertainty, tension, excitement, and even doubt. There will be current policies that clash with older policies which create some of the same problems that once existed in the past. So while great leadership in the United States can positively change and influence the entire world, how do we know what we are going to get into this time around? And how do we protect our life savings from or take advantage of the potential outcomes?

Well, the first thing I want to mention, and this is my personal opinion, is that the presidents themselves are blamed far too much for any economic instability or stock market weakness we may experience. And on the flip side, they are often put on a pedestal if we experience a burst in short term economic growth or real estate and stock market values, for example. Even though a president and their planned policy outlook will influence the way people and businesses think and feel, the reality is that they have very little impact on what actually ends up happening in the economy, let alone the stock market. One person simply cannot control the day-to-day decisions of hundreds of millions of people in the United States, as well as the world's biggest and most profitable companies.

However, it's largely those two things that end up driving our economy and also the stock market, which, by the way, are two very different things. Sure, stock markets may temporarily rise or fall due to the expectation of new policies or changes in tax law, but those movements are almost always temporary and incredibly similar to any other day the stock market reacts to either the newest apocalyptic headline you see the moment you wake up or the cautiously optimistic sliver of light at the end of the tunnel.

[00:04:24]:
This temporary market sentiment, be it positive or negative, typically begins to fade within twelve months or so of an election. In other words, the excitement or uncertainty begins to fade, just like that first cup of coffee in the morning, weighing less and less on the ups and downs of the market and your retirement savings. What ultimately happens to the economy at large or your investment portfolio will more so depend on where we are in terms of the business cycle, where inflation is, wages, interest rates, unemployment, housing supply, national security, stock valuations, the corporate earnings outlook, taxes, education, etcetera.

In other words, far too many incredibly large, complicated, and unpredictable mechanisms that all have the ability to single-handedly drive the market to new highs or send it into a terrifying yet always historically temporary decline. Again, a new president or cabinet may have a certain degree of influence over any one of these different economic drivers in the short term, but they cannot control all of them at all times, nor can they consistently predict their movements in the future.

[00:05:42]:
Otherwise, we'd have a permanent, quintessential economy, which, of course, as you know, we don't. Okay, so if the presidents themselves don't necessarily dictate the long-term performance of my various investments, is it better if we have a majority Republican Congress or Democratic? And where's the proof? Well, as I mentioned previously, the values of the investments at any given time in your retirement savings or your investment portfolios will fluctuate based on many different complex factors that are often completely independent of who sits in office. It's the same for the different political parties and the makeup of Congress as well.

However, the opinions and feelings of millions of investors across the globe surely do have an influence on how the stock market performs in and around an election year, which in turn will likely have some short-term effect on your personal investments as well. So, let me give you some numbers to help you understand how this has played out, at least historically. Just to keep the example easy to follow, I will be referring to the S&P 500 index, which is essentially a representation of the largest 500 or so companies in the United States. And on a side note, just so you're aware, the S&P 500 is commonly referenced when talking about the U.S. stock market as a whole, even though the U.S. stock market is made up of many more companies than just those included in the S&P 500 index. Remember, these are just the largest 500 or so based on their value or their size.

[00:07:20]:
Okay, so throughout history, in the election years themselves, the S&P 500 index has seen more positive performance than negative, going from 1928 all the way to 2020. So let's dive into this a little bit further. There have been a total of 24 elections since the S&P 500 index began. Of the 24 years, 20 of them were positive. So more than a 0% return, that's around 83% of the time. So that's point number one. So far, it doesn't matter what the makeup of Congress was or the president. Now, let's take it a step further.

When a Democrat was in office, and then a Republican was elected, the total return for the year averaged around 13%, give or take, over that time span. And when a Democrat was in office, and a Democrat was elected or reelected, the total return for the year averaged around 15%, give or take. Now, you might be thinking, oh, so historically, a Democratic president has somehow correlated to better stock market returns than a Republican. Well, not really, because all in all, no matter what the office makeup was prior to the election year, if a Republican president was elected at all, the average return was around 15%. If a Democratic president was elected, the average return was around only 8.5%. And in all election years, regardless of red or blue, the average return was around 11.5%. Now, let's take this one more step further and look at how the makeup of Congress specifically might have an effect on the outcomes in terms of performance.

[00:09:07]:
We will look at the average annual total return of the S&P 500 index covering the span from 1950 through 2022. Here we go. When we had a Democratic president and we had a largely Democratic Congress, the average return was around 13.5% annually. Now, the same president, but with a Republican Congress, around 18.5% average annual return. When Congress was split, it was around 16% average annual returns. Now on the flip side, when we had a Republican president and we had a largely Republican Congress, the average annual return was around 10%. If we had a Republican president and a Democratic Congress, the average return was around 7.5%. And again, when we had a Republican president, and we had a split Congress, the average return was around 17.5%.

So I know that was a lot of different scenarios in rates of return, but as you can see, at least historically, there hasn't been a particular strategy of investing in mainstream companies in the United States that will consistently produce any superior return based on who's in office or what the makeup of Congress is, regardless of their political party affiliations. This also shows us that there hasn't been any benefit to divesting out of the market or, in other words, selling your investments and sitting on the sidelines waiting to see what happens based on who may be going into office or based on any of the policy decisions that they plan to implement moving forward. It's also worth noting that these are averages. In any given election year, anything can happen. As I mentioned, markets rise and fall due to so many different factors other than the election itself, and no one has a crystal ball. So in any given election year, any number of things could happen the same as any other year. We are surely not saying that the S&P 500 index always experiences positive performance in an election year.

[00:11:17]:
These are just the averages. Now I think we've put the whole political party thing to rest. But what about the big issues that need to be addressed, such as the debt ceiling, for example? If issues like this don't get addressed or fixed, what implications might that have on my investments in my savings or the global stock markets in general? What should I do? Well, it's very common to have concerns about looming issues facing our nation, such as the insurmountable amount of debt the U.S. has and continues to accumulate. Rightfully so. This is something we should be concerned about because, let's face it, the U.S., or any country for that matter, cannot continue to accumulate debt beyond the output of that country or the rate at which the country's economy is expanding. Eventually, we will likely have stability issues and something somehow will crack. But that shouldn't surprise you too much. Our economy isn't perfect.

There are many things that break and require fixing all the time. For many who worry significantly about this issue might really be asking themselves or thinking, should I get out of the stock markets or move my money to different types of investments, or put a pause on the investing altogether and sell everything before this causes the markets to crash in some way?

The problem with this is that we have no way of knowing exactly what this issue would do to the global markets. We don't know when this could happen, and we don't know if the impacts will be short-lived or if they will last for years to come, or even what particular areas of the economy will be affected. Because no one can answer these questions as investors and retirement savers, we can't make any rational investment decisions based on that thinking. If you think about it, that would be pretty silly. When you first began investing, you likely didn't choose to invest based on the economic or geopolitical circumstances at that time, thinking that you would make money. No, you likely had a savings goal, such as retirement, for example, and learned that investing over the long run was one way to have your savings help you work towards that retirement goal.

[00:13:35]:
On the other hand, we can, of course, have our own assumptions and react impulsively or irrationally to any of our doom-and-gloom assumptions. But in the long run, those types of reactions tend to hurt far more than they help. If you react impulsively based on assumptions of what could happen, you will face even more issues when it comes to investing. For example, if you stop investing entirely or change your strategy altogether, you will now have to have a plan of when to start investing again. Or, in other words, “jump back in.” And if you stop investing and those negative things don't actually materialize for years to come, and markets continue to advance, you've now missed out, and then you inevitably have FOMO, and you want to get back into the party. Psychologically, this is a very tough game to play, and these decisions could damage your investment results permanently, let alone your investing choices moving forward.

Just to give you some insights into what I see in practice when someone wants to change their investment strategy entirely, whether that be completely changing what they invest in or they stop investing altogether, and then they realize that they've missed out on potentially significant market returns.

[00:14:54]:
They inevitably want to jump back in and invest how they were before. Except this time, it just so happens to happen this way. They get in at exactly the wrong time, and then markets fall, and so the values of their investments and their portfolios fall. And then the effect that this has on their psyche really drains them and it causes them to go into a spiral of terrible investment decisions only to continue losing money. So ultimately, I would encourage you to instead think about what exactly you're investing in when you're investing in the general “stock markets.”

Are you trying to invest in the short-term success or growth of the economy and trying to make a quick buck? Or are you a long-term investor in the world's largest, most successful, resilient, and profitable companies? Because if you're investing in the stock market in some way, shape or form, that is exactly what you're doing. You're buying a piece of ownership in those companies, not what the economy is going through at any given time. And I want to stress how important that is because history has shown us time and time again, crisis after crisis, that no matter what is thrown their way, these successful companies find a way to work through whatever has happened and do whatever is necessary to continue innovating and moving forward.

Think of the Covid-19 health crisis. Although the economy and the stock market suffered very suddenly and significantly, everyone had to pivot and find ways to work through it. And although there has been much devastation caused by Covid-19, many of the world's greatest companies not only got through the initial shock, but also innovated in ways that made our world a better place moving forward. We made advances in medicine at the fastest rates in history because we had to. Many industries can now have people working efficiently from home, and the list goes on. But the point is that these different crises serve as learning opportunities that companies can ultimately capitalize on and force continuous innovation. That innovation is what keeps these companies growing over the course of history. And if you're an investor, you get to go along for the ride. Said another way, these companies you have ownership in will do the pivoting for you in and around a crisis.

[00:17:18]:
You feeling the need to react in some manner is simply a siren song calling to you, likely caused by all the BS that the mainstream media feeds us nowadays. So if the debt crisis issues, or any other looming issue for that matter, were to result in some sort of existential shock, this time around would surely be different than any other we have experienced. Think about the fact that Covid-19 was a completely different crisis than the great financial crisis. However, the world's largest companies are worth billions more today than they were even before each of those crises. Each time is, in fact, different. But the effect on the world's greatest companies has been largely the same in the aftermath. And while history doesn't perfectly repeat itself, it often rhymes.

In the early seventies, we were worried about abandoning the gold standard. Today, it might be fear surrounding the value of the U.S. dollar and the debt ceiling. It's always something. So again, you have to ask yourself, what kind of investor am I? Why am I investing? What is the goal for my money or my different buckets of money? What does my financial plan tell me to do? If you have long-term goals, reacting based on today's news shouldn't be part of your to-do list. There will always be the potential for some sort of crisis or dark cloud heading towards us, as there always has been. The point is that we can't pretend to know how and when those things will materialize and the best investment strategy to deploy during them. Your strategy should be based on your investment goals, and they shouldn't change based on a hunch of what may or may not happen. Again, I'm not saying that you shouldn't worry about these issues, but there is a difference when it comes to making investment decisions based on them. Hopefully this gives you some clarity this year as we head into the election.

[00:19:12]:
If you're really feeling the urge to make adjustments to the way you invest because your good friend told you that you should consider XYZ alternative investment since the election is going to wreak havoc on what you're currently doing, I want you to go back to the drawing board and determine again what exactly you're investing for. This will help you decide on what to do. Oh, and don't forget to drop a knowledge bomb on your friend about elections and the stock markets.

I'll end the show on that note. Don't forget to sign up for the Retired-ish newsletter to get your free retirement planning quick guides for 2024. Plus, you'll get useful and easy-to-digest strategies and information on retirement planning, investments, and taxes once a month straight to your inbox. No spam. And hey, it's free.

If you find the information and strategies I provide on this show actionable and insightful, please do yourself a favor and subscribe to or follow the show on your podcast app and share with a friend who you think may benefit. Of course, if you want to learn more about the topics I went over in today's show, or you want to connect with us to start implementing financial planning in your life to save money and build wealth, you can find the links to the resources we have provided in the show notes right there on your podcast app, or you can visit us at retiredishpodcast.com/46. Thanks again for tuning in and following along. See you next time on Retired-ish.

[00:2033]:
Securities and advisory services are offered through LPL Financial, a registered investment advisor, member FINRA, SIPC.

The opinions voiced in this podcast are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which strategies or investments may be suitable for you, consult the appropriate qualified professional prior to making a decision.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
Investing involves risk including loss of principal. No strategy assures success or protects against loss.

The S&P 500 Index is a capitalization weighted index of approximately 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of approximately 500 stocks representing all major industries.

All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.