Should the Presidential Election Affect Your Investment Strategy?
Many voters have strong opinions about which political party is better for Wall Street. We took a look at past election years through the perspective of a long-term investor.
Keep in mind that tumultuous events have been a constant theme for presidential elections throughout history. Presidential candidates often draw attention to the challenges facing the nation — everything from economic policies to immigration — and campaign rhetoric tends to amplify the negative. These concerns can raise uncertainty among investors.
In 1968, for example, Richard Nixon and Hubert Humphrey faced off against a backdrop of the Vietnam War, civil rights protests and the assassinations of Robert F. Kennedy and Martin Luther King Jr. Fast forward to 2008, and Barack Obama and John McCain were debating during the worst economic crisis in decades. These political events can understandably distract investors and cause people to worry about their economic future. Are those concerns valid?
Consider the historical performance of Standard & Poor’s 500 Index over the past eight decades. In 17 of 18 presidential elections, a hypothetical $10,000 investment in the index made at the beginning of each election year would have gained value 10 years later. That’s regardless of which party’s candidate moved in to the White House. (See chart below.) In 14 of those 18 10-year periods, a $10,000 investment more than doubled, and each party saw a few instances when the investment would have tripled. While past results do not guarantee future returns, history has shown the value of maintaining a long-term investment perspective despite election-year fears.
Growth of a Hypothetical $10,000 Investment Made at the Beginning of an Election Year
Source: Thomson InvestmentView
Each 10-year period begins on January 1 of the first year shown and ends on December 31 of the final year shown. For example, the first period listed (1936–1945) covers January 1, 1936, through December 31, 1945.
For instance, in 1936 the U.S. was in the midst of the Great Depression. Democrat Franklin D. Roosevelt won the election, and a $10,000 investment made that year would have more than doubled to $22,418 by 1946.
Republican Richard Nixon was elected in 1968, and the next decade included the U.S. invasion of Cambodia, high inflation and the president’s resignation. However, over that decade, a $10,000 hypothetical investment would have grown to $14,240.
The only negative 10-year period? George W. Bush took office after the 2000 election year, which began the so-called “lost decade” for stocks. The S&P 500 posted a negative return for the period that included two seismic events: the dot-com crash in 2000 and the financial meltdown of 2008. In contrast, the biggest election-year return would have been in 1988, when George H.W. Bush won office, and $10,000 would have grown to $52,448 by 1998.
Long-term investment success has depended more on the strength of the U.S. economy than on which party occupies the White House during any particular four-year period. And the market has proven resilient time and again.
Long-term investors who began investing in any election year have generally come out ahead, regardless of the winning party. After all, your time horizon is likely to be much longer than a four-year presidential term. Those who look beyond the headlines, focus on long-term goals and avoid trying to time the market have tended to reap the rewards in the long run. That’s true not just during elections, but any time of the year. Bottom line: Beliefs about which political party is best for the markets may encourage you to vote, but shouldn’t discourage you from investing.