Politics bring out the best in people, right? Well, politics certainly brings out a very passionate side of Americans. Unfortunately, politics has done more to divide us rather than unite us lately.
For the weeks leading up to the midterm election, the stock market whipped back and forth in anticipation of changes to come. By the end of October, the S&P closed down 7%[i], rattling a few investors, but bringing a sigh of relief to many who had long anticipated a market correction.
Some investors cashed out their portfolio, worried of doom ahead due to the political climate. However, Warren Buffet has been quoted saying, “If you mix politics and investing, you’re making a big mistake.” Truly, whenever decisions are based more on emotion or opinion over fact, the results can be damaging to your investment portfolio. Therefore, when the market is volatile, it’s important to focus on the facts.
Since 1946, there have been 18 midterm elections. At the one-year mark following those midterm elections, the stock market has been up 18 out of 18 times! The stock market has been agnostic in regard to party lines. Despite the midterm election results, Republican President & Republican Congress, Republican President & Democratic Congress, Democratic President & Republican Congress, Democratic President & Democratic Congress, the market has had a positive return, one-year out.[ii]
The average one-year return following the mid-term election has been 17%. If you calculate gains from the mid-term low, the historical return was even higher at 32%.[iii] This gives good reason for investors not to panic, but rather, ride out the short-term volatility.
Focusing on historical trends, the second year of presidential terms have been the lowest performing year, which would be 2018 in our current presidential term. The third year of presidential terms has shown to be the highest performing year, potentially giving us something to look forward to in 2019[iv].
Despite current market volatility, the US economy is quite strong. As such, the Fed has raised interest rates 3 times so far in 2018, and has suggested they will raise interest rates a quarter point one more time before the year is over. While each interest rate increase creates market volatility, the Fed feels the economy is strong enough to sustain the higher interest rates, and the process heeds off inflation, which is important for a strong economy in the long-term.
An influencing factor on market performance at year-end is consumer spending. If consumer outlook is positive, spending tends to be higher and corporate profits follow suit. This often leads to what is affectionately called the Santa Claus Rally. Costco already has Christmas decorations up and Amazon, Target and Walmart are competing hard for online retail sales.
Aggressive investors who believe Presidential Cycle Statistics might be itching to buy stocks now. It is prudent to remember that past results are not indicative of future results. However, a diversified portfolio that balances both US holdings, international equities and some fixed income for downside protection would give you the ability to capture market rates of return without banking on one company or industry to “hit it big.”
If you’re feeling anxious, or excited, talk to your financial sounding board for a second opinion. A CPA can ensure your next move makes sense from a tax perspective, and a CFP® can ensure the investment suits your risk tolerance.
On a more somber note, you may have heard about Utah mayor, Maj. Brent Taylor, who was fatally shot last week while serving in Afghanistan. His body returned home to his wife and seven young children (ages 13 to 11 months old), draped under the American flag on Election Day. While in Afghanistan, Maj. Taylor helped to protect the democratic process, protecting Afghani citizens from physical violence so they may cast their ballot. In one of his last Facebook postings, Maj. Taylor wrote, “I hope everyone back home exercises their precious right to vote. And that whether the Republicans or the Democrats win, that we all remember that we have far more as Americans that unites us than divides us. “United we stand, divided we fall.” God Bless America.”[v]