Election Year Markets- Stay Invested, Stay Diversified and Vote!!

March 05, 2024

In America these days, we have little consensus on most things. However, many Americans believe that if their Presidential candidate wins, the economy will be great, and stocks will go up. On the other hand, if their side loses, everything will fall apart, and the stock market will plummet. Most humans make mistakes when investing and let their emotions come into play. And politics is perhaps the most emotionally charged subject of all. After last night’s Super Tuesday elections across the country, we thought it was a good time to look at market facts concerning past Election Years and what is likely in 2024.

From 1928 through 2020, there have been 24 Presidential elections. The S&P 500 has averaged a return of 11.57% in those years. In the 24 years subsequent to the 24 election years, the S&P 500 has averaged 10.67%. The average annualized return for all years from 1928 to 2021 was 10.2%. There is certainly no predictable pattern of performance in Election years that would suggest changing your long-term investment strategy during this period.

Let’s next look at the returns when a certain party is in power. Take a look at the graph below:

What you see is a continuing increase in the growth of $1 from 2026 until now. At a 10.2% annual increase, your money doubles every 7 years and keeps compounding. Certainly, the Great Depression was a negative and you can see downturns in 2000 (dot.com bubble bust), 2008 (Great Recession) and 2022’s crash. Even so, as we stated, the S&P 500 has grown 10.2% annually including these down times. At first glance, it appears election years with Republican winners saw markets advance more (15.2% average return) per year than Democrat winners (8.1% average return). But recessions actually matter much more to financial markets than the political party. A Democrat was elected during a recession more times than a Republican (four versus two). If you remove the election years where there was a recession, the annual returns by party are 16% Republican, 15% Democrat.

We can play with the numbers anyway we want. However, it would be foolish to think the market can’t make money if the “other” party is in office. The fact is that investor behavior does impact the markets. Interestingly, when their own party is in power, investors typically improve their portfolio performance because they perceive the markets to be less risky and stay fully invested. Conversely, those investors whose party is not in power often sit on the sidelines (perhaps in T-bills or CDs), waiting for their party to get back in control.

In the meantime, the markets continue to go up. Certainly, we all lost money in 2022. In 2023, as Brett pointed out in our Market Commentary in January, almost all markets went “up, up and away in 4Q23.” The Magnificent Seven that powered the S&P 500 to a 26% return in 2023 have slowed down somewhat, but are still pushing the markets upwards. The S&P 500, the Dow and the NASDAQ hit all-time highs in February. A diversified equity portfolio was likely up over 4% in the first two months of 2024.

Here's what matters. Corporate earnings are up, particularly for technology companies. Earnings growth is up 3% higher than a year ago. In the long run, no factor may have more impact on the performance of stocks than company earnings. At the same time, the current inflation rate is 3.1% and the current unemployment rate is 3.7%. Consumer sentiment is at 77, up from 67 a year ago. In short, the economy, which drives stock prices, is doing great. America has the best economy and lowest inflation in the world. In fact, the U.S. economy is so strong that the Fed is now delaying rate cuts.

Frankly, it’s a very good time for you to be fully invested. After a crash, markets do recover and return to new highs, as we have seen both recently and over the last 90+ years. Furthermore, when a bear market turns to a bull market, the greatest acceleration rate in growth is in the beginning of the upward curve. Fear subsides and more investors jump in. Now is an excellent time to stay fully invested.

Also, you need to remember not to put all your eggs in one basket or even in one basket holding the Magnificent Seven stocks. With the huge run-up of Apple, Alphabet, Amazon, Microsoft, Meta, Nvidia and Tesla, those seven stocks have an overall price/earnings ratio of 43. This means their stock costs $43 for every one dollar of future projected earnings. This P/E ratio is now 2.4 times the historical 20-year S&P 500 average P/E of 18. However, other large company stocks, as well as small and mid-cap domestic stocks, international stocks, and emerging market stocks are currently valued near or below their historical P/E ratios. When this happens, a regression to the mean is very likely. This simply means the big leaders come back to the pack, by slowing down and the others catch up to the historical averages. For this reason, we continue to believe, as we have for our 24 years of providing prudent investment advisory services to our clients, that diversification is key. Now is the time to stay diversified.

Lastly, the 2024 election is extremely important. You need to vote in November. Our country is now almost 250 years old. We have grown from 13 colonies to 50 states and a population of 340 million people. We have become the greatest nation the world has ever seen. Yet, we have problems, lots of them. The likely Presidential candidates have expressed completely different views on how they would govern the country in 2025 if they were to be elected. There is no question that there would be a wide difference in what our country would look like in January 2025 based on who wins. Each of us must take the time to review the facts and make the best decision for ourselves and America. The right to vote is the foundation of our democracy. Please cast an informed, educated vote in November!

Detterbeck Wealth Management is a fee-only financial planning / wealth management company with offices located in Palatine, IL (Chicago area) and Charleston, SC areas serving clients locally and across the country. To contact us about setting up an appointment, please see our contact us page