Will the election cause a market crash?

Will the election cause a market crash?

On June 18, no one in our Orlando office came to work. They didn’t go on strike or play hooky – their absence was planned. Why would we not have anyone in the office? Because we were encouraged to stay away from downtown due to the increased traffic and altered traffic patterns for President Trump’s rally announcing his bid to be elected for a second term.

By the time President Trump announced his run, in excess of 20 people had already declared they sought the Democratic party nomination. Since presidential campaigns are starting earlier and earlier, we thought it wise to help you prepare early too, especially since the rhetoric gets nastier and emotions run higher with each election.

Every four years, we hear the same pitch from the candidates. To paraphrase it, “There is or will be a bad thing that you should fear or be outraged about. This bad thing would not be an issue if it were not for the other party. Vote for me and the bad thing will go away.” And when this election is over, the same pitch will be repeated in anticipation of the next election.

With each election, we also hear the same concerns from people regarding the election and their finances. “Yeah, I know the market is resilient and the same pitch is given every election, but this time really is different. And if _________ (fill in the blank) gets elected, we are going to lose money.”

The clear suggestion from the candidates (and the worried people) is that the odds of a market downturn are high. But is that true? Well, in one sense the answer is unknowable. We do not know what the future holds. But if we look at past market behavior, we know trying to maneuver a portfolio based on how an election proceeds and how we feel about its outcome is speculative and not something a prudent investor needs to do.

Market volatility around elections

The S&P 500 index began publishing results in 1926. In 1928, Herbert Hoover ran against Al Smith. Hoover ran on the coattails of the Calvin Coolidge’s roaring twenties. The index rose strongly during 1928. Hoover won and during his first year in office, the crash of 1929 occurred.

…the suggestion that election cycles cause greater market volatility is not supported by the facts.

There have been 22 elections since Hoover vs. Smith. If we consider both the election year and the year of inauguration, we see a combined total of 46 election-related years. Fourteen of those 46 years (30%) have produced negative results. That is nearly the exact same frequency of loss over the entire history of the S&P 500. Further, the market dropped by 10% or more during 24 of those 46 calendar years. This is almost the same frequency that intra-year corrections have occurred in all years. So the suggestion that election cycles cause greater market volatility is not supported by the facts.

Nor is it true a specific election outcome will result in a specific market outcome, or that certain combinations of a party in the White House and in each of the chambers of Congress is predictive of market behavior. Those are popular story lines in the media and they are rubbish. There is no statistically significant difference between the various combinations of presidential and congressional parties (Riepe 2004). There simply hasn’t been an election in which the candidates did not suggest trouble if their opponents were elected and vitriolic speech is hardly an invention of Twitter or biased news outlets. It has been going on in America since its birth.

Negative campaigning is not new

A Forbes article from 2012 does a great job of highlighting the history of negative campaigning. For instance, a Connecticut paper said if Thomas Jefferson was elected, the United States would be a nation where “murder, robbery, rape, adultery and incest will openly be taught and practiced.” A Jefferson supporter countered that Jefferson’s opponent, John Adams, was a lying warmonger who “behaved neither like a man nor like a woman but instead possessed a hideous hermaphroditical character.”

Twenty-eight years later, Andrew Jackson’s campaign accused John Quincy Adams of pimping out a young girl to the Czar of Russia and Adams accused Jackson of being an adulterer and labeled Mrs. Jackson a polygamist. The Forbes piece also includes a dark, foreboding LBJ television commercial claiming a Barry Goldwater election would result in a nuclear attack and the death of children.

We all want to be good citizens. We want to stay informed and vote for the candidates we feel will be best. By all means, seek good information to understand the candidate’s positions accurately. But please, try not to let the media get you so worked up that you want to alter a sound financial plan due to fear over the short-term behavior of markets around an election. It rarely works well for those who try.

Most election cycles include market pull backs but also produce decent outcomes over those years, not horrible bear markets.

Most election cycles include market pull backs but also produce decent outcomes over those years, not horrible bear markets. Remember, as a prudent long-term investor, the gurus forecasting economic and market reactions aren’t even talking to you. They are addressing those who have put themselves in the precarious position of needing to predict the unpredictable. Ignore the market prognosticators. Ignoring all their prior predictions of doom and how “it really is different this time” has been sensible, so chances are ignoring them this time will also prove sensible.

Our clients are appropriately positioned for their long-term goals and their investments are managed by a MFT team that knows how to handle news, noise, and both good and bad market behavior. When a down market does arrive, whether in conjunction with an election or not, remember that MFT builds portfolios which have withstood truly horrendous environments, and should again.

We are very thankful to our clients for trusting us, our investment approach and our financial planning guidance – past, present and through whatever the future brings. We vowed we would manage your assets with only your best interests in mind and would not speculate with your life savings. Rest assured, we will keep that vow. So, go ahead and formulate your opinions of the candidates and argue on their behalf with all the passion you wish to display but be careful not to go too far. Heightened emotions are not conducive to rational, productive discourse and sound decision-making. Focus on what you can control. Diversify, stay patient and disciplined. Ignore the noise. Invest, don’t speculate.

Suggested reading from recent years:

Should I prepare my portfolio for a post-election drop?  (2012) Describes how betting on “patterns” about how various parties holding the presidency or the houses of Congress has been costly in the past.

Which presidential candidates will be good, or bad, for the markets? (2016) Explains how almost every president in modern times saw tough times in the market and the economy, suffering bear markets and recessions.

Assessing the “Trump Bump” – What to Do Now (2017) Describes the futility of market timing and describes differences between how investors and speculators answer fundamental questions about market behavior.

Easing stress during uncertain times (2011) How sound financial planning can keep you making good decisions. Memorize the seven guidelines.

Will a stock market correction ruin my financial plan? (2014) Why good plans can make stock market corrections inconsequential and a bear market should be something you can weather.

News & Notes

Financial literacy for our children. Basic financial literacy is shockingly low for such a developed nation as the U.S. After seven years of lobbying, Charlie Fitzgerald, CFP® and the FPA of Florida finally saw the Financial Literacy bill signed into law by Governor DeSantis on June 24, 2019. In a rare display of universal agreement, it passed in both the House and Senate chambers with unanimous votes. The measure requires all 550 Florida public high schools offer a one semester elective in Personal Financial Literacy beginning next year.

MFT featured for innovative hiring program. The development of the financial planning profession has always been an important objective of our firm. We have dedicated countless hours to the effort. To this end, we are one of the first firms to partner with the CFP Board to offer a “returnship.” A returnship is essentially an internship for professionals who pulled themselves out of the workforce, often to raise children or care for a family member. A CNBC article highlighted the program and our participation in it and quoted our Office Manager/Chief Compliance Officer, Sara Nash, several times. The article included a link to the job opening information on the new “Careers” page of our website. 

MFT named to “Fast 50”:  Ron Tamayo, CFP®, EA and Mike Salmon CFP®, EA represented the firm at a banquet honoring Orlando Business Journal’s “Fast 50” – the 50 fastest-growing privately owned companies in Central Florida. Said Ron, “We are honored that our firm is part of such an impressive, innovative group of growing companies. Thanks to our great team of employees, clients and business partners.” At the event, Ron collected the trophy and Mike was interviewed about how we achieve strong growth. He appears at 2:15 of this video.

Please remember to call us: When anything significant happens in your life, including changes in your finances, family, or health that could affect your financial plan, please let us know so that we can adapt our planning and portfolio work for you accordingly. Also, if you ever fail to receive a monthly statement for one of the Schwab Institutional or TD Ameritrade Institutional accounts under our management, please let us know so we may assure the respective custodian delivers your statements promptly.

Yours truly,

The Team at Moisand Fitzgerald Tamayo, LLC