Don’t Worry – It’s Not That Big of a Deal
It’s not enough that we are on the verge of being bombarded with rhetoric from two candidates running for the highest office in the land. The financial pundits also will spew scads of words on the historic performance of stock market returns during a presidential election year.
It’s okay. The facts are that it doesn’t make much difference and is hardly a basis upon which to make any decisions regarding how you invest your hard-earned money. If you enjoy that sort of thing, listen and enjoy a chuckle. If you find it grating, feel free to change the channel or read something else with the knowledge that you haven’t missed much.
Please understand, I am not slighting the importance of who we elect as President of this great land. I’m just saying that predicting stock market returns based on the fact we are having an election, and the results of who wins, is folly.
I’ll give you some facts that illustrate my point, and then give a brief overview of strategies designed to help reduce investment risk if the stock market does go south.
In a February 2016 article for Kiplinger Today (How the Presidential Election Will Affect the Stock Market), Ann Kates Smith outlined some facts compiled by the Stock Market Almanac. Smith reported the Dow Jones industrial average has gained about 10.4 percent on average in the year before a presidential election. The Dow has gained an average of nearly 6 percent in election years (that would be this year). Further, the Almanac says the first and second years of a president’s term see average gains of 2.5 and 4.2 percent respectively.
Now that you know the averages, throw them out the window. Averages are not reality and the current cycle proves it. The Dow rose 27 percent in the first year of President Obama’s second term and 7.5 percent in year two. The strongest year of the cycle, based on the “averages,” should have been last year. Instead, the Dow dropped 2 percent. It gets better (or worse?) for the theory of averages. Remember 2008? The Dow sank nearly 34 percent and that was an election year–when returns were supposed to be decent (averaging 10.4 percent).
Does Party Matter?
Again, I’m not talking politics here. Vote your conscience, but know that historically the party in power has little impact on stock market returns. In the January 2016 Market Perspectives report for investment company BlackRock, Russ Koesterich says other factors are more important. “Whether a Republican or Democrat occupies the White House has historically had no statistically significant impact on U.S. equity market returns.” Koesterich, who is BlackRock’s chief investment strategist, says that once you adjust for the normal variation in stock market returns over the past 114 years, there is little difference between Republican and Democratic administrations from a stock market perspective.
Predicting the Election
While predicting stock market returns based on elections might be folly, the Kiplinger Today article argues that predicting the winner based on market performance before the election has some merit. The article cites a report by Jim Stack, a market historian and publisher of the newsletter InvesTech Research. Kiplinger quotes a Stack report that says the S&P 500 has an 86.4% success rate in forecasting the election. In the 22 president elections since 1928, 14 were preceded by gains in the three months before election day. In 12 of those 14 elections, the incumbent (or the incumbent party) won the White House. Conversely, in seven of eight elections preceded by three months of stock market losses, incumbents lost. Exceptions to this occurred in 1956, 1968 and 1980.
A Better Way Forward
The recession of 2008 was a bitter reminder that traditional methods of investing are unsafe. I advise against an investment plan solely based on the old saying that “the stock market always goes up.” Guggenheim Investments updates a study annually showing there are four periods of 11 years or more in the last 119 years when the market was flat or down during those periods. The latest study, through the year 2015, can be found here. Yes, the market eventually came back, but if you were counting on healthy stock market returns to support your retirement during those long periods, you were out of luck.
My firm uses what we call Lifestyle Driven Investing™, and it starts with seeking to determine how to meet the necessities of life. I classify these as Needs, and they include food, clothing, shelter, life insurance, long-term care and disability insurance. The other categories are paid for as funds are available and we label them as Wants, Likes and Wishes.
We want to avoid basing your financial future on myths. Your investments to fund the Needs category must produce sufficient income when you need it, presumably at retirement. This has to be available as cash flow. The major criteria are that the investment strategies must be considered safe or predictable or guaranteed. Rarely will you find an investment that includes all three of these attributes, but I believe investments must defend at least one of the criteria to fund your Needs.
I have intentionally made the criteria for this category very strict because they are the key to survival. For the other categories (Wants, Likes and Wishes), my recommended criteria are more flexible.
Still, it all comes down to a plan that strives to include safeguards to protect cash for your Needs first. You will sleep better than relying on the whims of politics.
Securities offered through LPL Financial, Member FINRA/SIPC. Financial Planning offered through Lifestyle Planning Solutions, a registered investment advisor. Investment advice offered through Stratos Wealth Partners, a registered investment advisor. Botsford Financial Group, Lifestyle Planning Solutions and Stratos Wealth Partners are separate entities from LPL Financial.
For a list of states in which I am registered to do business, please visit www.botsfordfinancial.com.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendation for any individual.