Presidential elections have inspired numerous stock market theories, and these can distract 401(k) investors as they try to figure out what the outcome means for their retirement portfolios. At the same time, uncertainty in the equity market tends to rise along with rising political uncertainty. Uncertainty over who the incoming president will be and what policies they may change or introduce can weigh on markets.
To have meaningful conversations with plan participants, while helping them keep the election in perspective and stay focused on their goals, it’s valuable to know some of the facts of how presidential elections have historically impacted the markets. And it’s wise for you to review the message you want to communicate as you respond to questions and concerns.
Historical trends of presidential election years
Keeping in mind that past performance is no guarantee of future results, stock market historians have regularly analyzed market behavior during presidential election years and how markets behave depending on which party holds the reins of power in Washington. As they review this data, they look for patterns that can perhaps tell us something useful for the future. Of course, much of this performance could also be chalked up to macroeconomic factors unrelated to a presidential race.
- Presidential elections tend to be accompanied by volatility in the stock market when, like this year, no incumbent is running. According to data compiled by Merrill Lynch, since 1928, the S&P 500 Index has declined an average 2.8% in presidential election years that don’t include an incumbent seeking re-election. That compares to an average annual gain of 7.5%.
- Returns tend to be lower in election years., since 1948, the S&P 500 has gained an average of 6.1% in election years, compared to 8.8% in any given year.
- But returns still tend to be positive during election years. Also according to MarketWatch and also since 1948, the S&P 500 has posted a positive gain 76% of the time during presidential election years versus 71% in other years.
- Harmony tends to be good for the stock market. When the White House and Congress are controlled by the same party over a two-year stretch, the S&P 500 returned an average of 16.9% since 1928. InvesTech Research notes that when Congress was controlled by the party that didn’t occupy the White House, the return of the S&P 500 averaged 15.6%. When control of Congress was split, the S&P 500 only averaged 5.5% a year, regardless of which party occupied the White House.
- Can stock market performance signal the outcome? Since 1928, when the S&P 500 advanced during the three months preceding Election Day, the incumbent party won the White House 86% of the time. InvesTech further reports that when the S&P 500 declined during the three months prior to the election, the incumbent party lost the White House 80% of the time.
What 401(k) plan participants need to know
In communicating with 401(k) participants, a good approach is to stick to the facts of what’s happening in the economy and markets. The goal is to help 401(k) investors avoid making decisions based on emotions rather than on logic and fundamentals.
Here are some ideas on messaging you may want to share with 401(k) participants when appropriate:
- There are a lot of theories and speculation given to the influence of presidential elections on the stock market. None of these theories appear to provide actionable information that has the potential to benefit long-term investors. We believe investors would be better served by developing a sound investment strategy based on their needs and goals, rather than making changes based on political outcomes.
- While a presidential election undoubtedly affects Wall Street, it is just one of many factors determining a year’s market performance. What really drives performance in the markets is not the presidential election, but rather the overall macro economy.
- Remember, you are investing for the next 10, 20 or even 30 years. Just like you shouldn’t panic and make rash decisions due to short-term market volatility, you shouldn’t panic and make rash decisions based on who gets elected.
- It’s important to remember that markets have performed well under both of the nation’s main political parties. Indeed, the U.S. economy finds a way to grow and markets continue to perform despite all the changes in political parties, Congressional actions, tax laws and government regulations.
- When it comes to the performance of your retirement portfolio, history shows that it doesn’t matter much which party was in the White House. Looking back to 1900, whether a Democrat or Republican occupies the White House, there has been no statistically significant impact on U.S. equity markets.
- Election years and rhetoric around market performance during election years should not dictate your investment decisions. Instead, it’s useful to focus on the basic fundamentals of sound investing, diversify your portfolio appropriately and invest for the long term.
- History has shown that markets have demonstrated relative resiliency regardless of election results or the current popularity of elected officials. Economic conditions will have a far greater impact on the elections than the other way around, as presidents only have a limited ability to affect the economy.
- Any volatility related to the presidential election alone will be short-lived and ultimately will not change the fundamentals in the economy. Careful diversification of your portfolio can cushion the effects of any short-term market volatility.
Communication is key
Communication with 401(k) participants can help neutralize any anxieties caused by all the rhetoric around the presidential election. It’s important to remember that just because 401(k) investors aren’t expressing their worries doesn’t mean they aren’t anxious and don’t have questions. You can include appropriate messages about market performance and presidential election years in your regular communications and even provide a timely seminar on market conditions for the remainder of the year.
Pete Muckley is vice president of marketing with Trust Company of America (TCA), responsible for leading the company’s marketing and communication initiatives. He has more than 30 years of experience in marketing in the financial services industry. Muckley leads the team that is responsible for the company’s product marketing efforts, brand positioning, qualified lead generation and go-to-market strategy.
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
