Elections do have consequences. But if the past century is any guide, the long-term consequences of US presidential election years on investor portfolios, including 401(k)s, is minimal at best.
A recent analysis by retirement planning firm TIAA considered how a moderate-risk portfolio with 60% stocks and 40% bonds fared across all presidential election years since 1928. Turns out there were only four years that had negative returns: 1932 (down 1.4%); 1940 (down 4.7%); 2000 (down 0.8%); and 2008 (down 20.1%).
Unsurprisingly, those four presidential election years occurred at times of seismic events: The Great Depression. World War II. The implosion of the tech bubble. And the housing and financial crisis that created the Great Recession.
But, over time, those negative returns didn’t move the needle in terms of long-term average performance. TIAA found that a 60/40 portfolio had an average annual return of 8.7% across the 24 presidential election years since 1928 — just a hair above the 8.5% average for the same portfolio during all non-election years over that same period.
“Over a very long period of time, it washes out,” said Niladri Mukherjee, chief investment officer at TIAA.
Of course, very few investors have a portfolio in play for that long and even fewer maintain the same stock-to-bond ratio throughout.
But even if you look at shorter time horizons and just focus on stocks, the same general trend appears to hold.
The S&P 500 alone has generated an average return of 7% during presidential election years since 1952, according to LPL Financial. If you limit that to presidential election years in which the incumbent president is running for reelection, the average jumps to 12.2%.
“We believe this pattern is partly due to the incumbent priming the pump ahead of the election with fiscal stimulus and pro-growth regulatory policies to stave off potential recession and encourage job growth,” Jeff Buchbinder, chief equity strategist at LPL, wrote in a December 2023 blog post about his firm’s analysis.
What about this election year? Whether the winner is President Joe Biden or former President Donald Trump, how the markets react in the short term are difficult to predict. “Election years come with higher levels of volatility,” Mukherjee said.
The longer-term consequences in the markets are even harder to gauge.
While past performance is no guarantee of future results, if history is any guide, investors will factor their decisions going forward based on fundamentals in the United States and around the world, as well as the risks of geopolitical unrest, Mukherjee said.
In other words, he noted, economic growth, corporate profits, inflation, standard of living and productivity will remain paramount.
Market analysts from US Bank echoed similar sentiments in a report late last year. “Economic and inflation trends have demonstrated a stronger and more consistent relationship with market returns than election results,” they wrote.
What’s more, how the House and Senate take shape will play a big role in how policies are achieved.
“The makeup of Congress is really important when it comes to fiscal policy and real changes that can be implemented,” Mukherjee said. “Even though (presidential) candidates say a lot of things, they may not be able to implement them.”
Generally speaking, no one can consistently and successfully time the market or predict the future. So, being sufficiently diversified across different asset classes and sectors, while also very conservatively investing money you’ll need in the next few years, has always been sensible advice.
So if you’re anxious about the upcoming election — or just dead certain US and global markets will react one way or the other depending on the winner — Mukherjee recommends not making investment decisions based on your predictions. Instead, he suggests you consult with a financial adviser to make sure your current allocations fit well with your time horizon, risk tolerance and goals. Or, if those already do, maybe just sit tight.
“If you’re not going to make a change in a nonelection year, you shouldn’t do so in a presidential election year,” Mukherjee said.
You also may want to consider some useful tips on how to avoid investing based on your strong feelings from psychologist Daniel Crosby, who wrote “The Behavioral Investor.”
For instance, Crosby warns, if your fears are activated, you can panic and sell at the wrong time, he said. Or, if you’re elated, your optimism may distort your level of risk in an investment.
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