As if 2020 wasn’t turbulent enough, the news is all over speculating about stock market performance in an election year. Personally, I hate to talk about short term stock market performance—or any type of investment right now for that matter—because, frankly, it’s just more noise you don’t need right now!
But in many ways, I’m an optimist and a data geek, and it’s hard for me to ignore the facts. And so, I’m compelled to talk about the stock market performance in election years to provide you some historical context. Outside of a home and savings accounts, most people’s investments are tied up in stocks. So of course, stock market performance becomes very important, very fast. Looking at the big picture can also calm your nerves—at least about one part of your life.
Lately, I’ve been hearing from friends and clients about how they fear the global pandemic, climate change rearing its head in all sorts of ways, another Supreme Court vacancy, and a polarized country. With all that going on, we must be ripe for a market crash . . . or perhaps worse, a complete meltdown, right?
I completely get it. Things feel awful in a lot of ways right now, and it’s hard not to doomscroll our way through our day.
With that being said, I want to remind you to stop and take a deep breath. Let’s look at the big, historical, actually not-so-bad picture: The U.S. stock market has had consistently positive returns.
Yes, you read that correctly. Read it again: The U.S. stock market has had consistently positive returns.
The average annual return on stocks over the past 150 years has been roughly 9.0%. That’s not to say that there won’t be bumpy periods (every four years on average, stocks will fall), but despite some pretty awful things happening, stock investments have, as a whole, performed well. Let’s not forget that many crises have happened over the last century. We had World War I, another Pandemic (Spanish Flu), a Global Depression, World War II, The Cold War, three U.S. Presidents were assassinated, and a terrorist attack on 9/11, just to name a few significant events.
Of course, there was also 2008, when the world was enduring a global financial meltdown. Stocks returned -37% that year. But what followed was nine years of positive returns after that. So even if you lost money in the market, you ended up gaining that back and then some.
I say all this to put your minds at ease over at least one thing. I’ve been hearing from both sides of the aisle about how the outcome of the presidential election may indeed mean that the economy and your portfolios will suffer. There’s also historical context that’s important to consider with this assumption. While you may not feel comfortable with the outcome of the election, hopefully the facts will assure you that you don’t have to take drastic measures.
The Months Leading up to an Election: Hold On!
September and October have always been more turbulent months for stocks! You read that right: September and October in election and non-election years are on average some of the weakest months for stock performance. The largest one-day market crash happened in October 1987.
So when you see a little bumpiness in the market, know that it makes sense. During election years, all the rhetoric could amplify some of these moves, of course. In fact, LPL Financial compiled the data, which shows that September and October stock returns in election years are, on average, negative. The data shows that September on average is -0.2% and October is -0.7% in election years. The other months are all on average, positive.
Just what is stock market performance in election years then?
Even with the rocky months leading up to an election, typically the months after an election are quite good. The average stock market performance in election years turns out to be positive ~82% of the time. No matter which party wins the White House.
As of the writing of this blog, the stock market is up a couple percentage points so far this year. Furthermore, if you dread which party may be in power for the following four years, historically it doesn’t really matter for stock market performance. But obviously, an election outcome can take a more serious tone for other reasons.
Given all this, what should you do?
The unsatisfying answer is: Nothing. Stick to your long term investment plan and try to manage the intense emotions that have come along with it. Stay the course despite how precarious things may seem.
Read More: Creating a Long Term Investment Plan
If you’re feeling a little wobbly, reach out to your financial advisor if you have one, or just try the best you can to look at the data and think about the bigger picture to put your mind at ease.
While the best thing you can do for your stock portfolio is sit on your hands, when it comes to our democracy, it’s the opposite. James Clear recently said, “Action relieves anxiety.” If you’re feeling stressed about your investments, channel that energy into action, whether that’s making calls, sending postcards, or talking to people. Whatever you choose, vote, and vote early!
Interested in working together? Learn more about my financial planning services!
Jim is a financial advisor and owner of Thinking Big Financial, Inc. Thinking Big Financial is a fee-only registered investment advisor offering financial planning and investment management services. Specializing in working with the LGBTQ Community.
Please read my legal disclaimer here.