Election Year Financial Planning

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February 14, 2024

There’s always a lot of worry and speculation surrounding the stock market during a presidential election year. In this Jake’s Take video, Castlepoint Partners Jake Weatherford, CFP®, and Adam Lee, CFA®, discuss the effects of an election year on the stock market.

They highlight that, on average, the stock market tends to have positive returns during an election year and the year after. They also mention that the market’s performance is driven by long-term factors such as technological improvements and overall economic growth, rather than specific political events. They emphasize that it is important for investors to stay invested during the good times and not try to time the market based on election outcomes.

Overall, Jake and Adam suggest that investors should not panic or make drastic changes to their portfolios during an election year.

Video Transcript:

Jake Weatherford:

Hey everyone. Welcome to 2024. We are in an election year, and with that we always love to bring up and highlight the effects of an election on the stock market or maybe lack thereof. So Adam and I today are going to jump into what happens typically during an election year. A lot of folks get a little bit worried about, Hey, it’s an election year, what’s going to happen in the stock market? So we will solve all the problems, but we’ll dive in a little bit to the typical effects, what we’ve seen, and it may be a little bit different than what you believe or than what you think. So without further ado, and I guess I will preface with these are not political statements and I think you’ll find that it’s actually quite similar, but we will go into a little bit of overall Republican and Democrat, what’s happened.

So I’ll just dive right in with that. And what the data tells us is on average during an election year and the year after, it’s actually positive returns in the stock market, which shouldn’t be surprising if the stock market goes up 75, 70, 80% of the time in a full year. We would kind of expect that it would also do that in an election year. But some people that do get flustered, maybe that is shocking, I don’t know. So overall during election year, as you’ll see on the visual that we put into the video, you’ll see that overall is 12% positive. Republican does have a slight edge on Democrat at 14% and then 9% for Democrat the year after. We actually see the opposite. So the year after average is over 11 Republicans, they do get beat a little bit there at positive 5% and then the Democrats at positive 17%.

And then we have some during term data there that I won’t go into. But I guess the biggest takeaway for me is that number one, it’s probably a little bit surprising that all of these are positive, but really should it maybe it shouldn’t be because that’s typically what we see anyway is we see positive returns from the stock market. That’s why we invest in stocks because over a long enough period of time they go up. So when we take the average of a long period of time, we should expect it to be positive. So then the next question is, okay, what about year by year? And I’ll let Adam go into a little bit of that from the opposite angle of how many of these are negative and how close does that relate to the actual election. So Adam, I went over averages. Why don’t you dive into a little bit of best and worst?

Adam Lee:

Yeah, absolutely. I think the first thing to think about even before we get into the specifics is just thinking about what are in general, some of the worst things and best things that have happened for markets. And it’s kind of a weird question to ask because the worst things, because markets tend to go up over time, the nature of the worst things is usually real specific things that happen that you can say it was this event, right? The good things are sort of boring stuff that happens in the background, like corn yields go up a lot or the internet slowly permeates everything. And now we have smartphones, and it’s hard to say the day that phones became awesome, but they certainly became awesome over the last 20 years compared to what you were rocking in the nineties. So there’s a little bit of, okay, thinking about bad news versus good news.

When does that happen and how does that correlate with elections? One of the worst during election year returns was 2008, and a lot of people probably remember that can think about that. And again, setting aside all the politics with that, that was at its heart anything can become a political issue. But that started as a very kind of nerdy, wonky thing about interest rates and housing and housing speculation and trickled through the entire global economy. So 2008 wasn’t some president came in and enacted their policies and then the market hated it. It was kind of a idiosyncratic thing, similar, another during election year and after election year, really bad return year was 2000. That was kind of the popping of the stock bubbles of a lot of tech companies. And again, I would argue tech company valuations changing rapidly wasn’t the policy of any particular administration.

It’s something that happened you think more recently with Covid, obviously that wasn’t necessarily during our election year, but the market downturn that came with Covid, that was a truly freak kind of thing that nobody probably had on their bingo card for that year wasn’t really initially related to politics in any way. And so going back through this, the bad years, I think what you’ll see consistently across all of them is they didn’t necessarily correspond to an election year. They just happened to be every fourth year is an election year. And so sometimes election years happen to be years where really dramatic bad things happen. And in terms of good news, to your point, that’s why we see a lot of single good years. But the theme driving those good years overall is really boring. Long-term stuff like technological improvements, not necessarily even for the company that invented ’em, but just as they permeate throughout society, benefit all companies, all economies.

And so yeah, there’s not a whole lot to say about, Hey, this year this person was elected and this happened. The last thing I would say too is to the extent elections have an effect or that we would guess that they would have an effect on markets, it’s mostly a positive one due to the fact that uncertainty is eliminated after election day. So most companies, it doesn’t really matter day to day exactly who’s in office, where Apple’s going to make iPhones regardless of who’s president, but there probably are some industries that certain regulations that impact them hinge on who’s in office. And certainly there’s good outcomes for some people and bad outcomes for the other. But if you’re trying to run a business, the most important thing is that you know what the rules of the road are and you understand what you can plan for ahead of you. So the uncertainty that is eliminated by the election passing and those people in sensitive industries understanding the rules of the road, kind of can have the effect of increasing the value of the companies because it’s like, Hey, we don’t have to plan for all this risk, all this uncertainty, these different scenarios. We understand the rules of the game we’re operating under now.

Jake Weatherford:

That’s good. So right now let’s say is January February timeframe. By the time this video gets out, it’ll be February timeframe. What should I do to prepare my portfolio for an election?

Adam Lee:

Yeah, man.

Jake Weatherford:

Or not do?

Adam Lee:

I think probably not do is the answer, right? I think just keeping reminding yourself how boring, how boring and apolitical all the reasons are that equities go up over a long period of time. It’s totally non-controversial things like should people be allowed to buy smartphones and are crop deals going up over time? Because companies are working really hard at it. Are people in industries everywhere trying to get better at their jobs every day? And maybe there’s some people out there that the day after the election, depending on what the result is, they’ll start calling in sick all the time for work and doing a really bad job at their job. But most people out there in the world, they may have very passionate feelings about who’s in office, but it’s not going to fundamentally change really human nature in that people come show up and they try to innovate, try to make things more efficient. And that’s what’s going to over a long-term, drive the stock market up.

Jake Weatherford:

We shouldn’t sell all our stocks because an election’s coming up, we shouldn’t go all to cash. Okay, that’s fair. I will, I guess highlight real quickly because I found it interesting that the best returns on this sheet, I won’t go over all of them, but best returns in election year 40, 30, 40% year after 30 to 50%, and then during term, it’s kind of consistent there with average of about 32 overall. So I do understand the feeling of uncertainty, especially before an election and how people feel that way and worry about, hey, what’s going to happen? And sometimes during election year we can see the market worry about it too with it going up and down. But frankly we can see the market worry about a lot in any year. So it’s like, yes, I understand your uncertainty Mr. And Mrs. Smith or whatever, but the fact that the market knows that there’s certainty coming and when the market sees that certainty, whichever side it is, the market tends to like that. And we’ve seen that in the past couple of elections, which I found interesting. We’ve seen some sharp dips and sharp rebounds. So it’s a topic that is similar to most in the fact that the market likes certainty. And when we get that, we see good things happen.

Adam Lee:

Absolutely. I think the last point I would make that kind of dovetails with it, and I think we’ve covered this probably in a video before, but the other thing to remember, I’m glad you highlighted some of the best years, because what is crucial to success as a long-term investor, and I said this over and over again, is you need to be invested during the good times. It’s not about being defensive in the bad times. And sure if we had a crystal ball and we could perfectly predict the bad times and trade out of the market right before ’em and get right back in, sure investment in this, right?

Jake Weatherford:

No, we don’t.

Adam Lee:

But if we had to pick the skill of avoiding the bad times versus the opportunity to be invested in the good times, we pick the good times every single day. We’ve done different analysis on this of, Hey, what if you were able to sell it at the top? You had to stay out of the market for several years, would you be better off? And the answer is pretty much no. I mean, it really is not that much of a benefit to your portfolio to avoid the bad times. It’s crippling to your portfolio to miss out on some of the good times. And as we see during election years, after election years, it is tough to know exactly what the good time in the market’s going to be, but we definitely want to be invested for it.

Jake Weatherford:

That’s good. Alright, there you have it. Don’t sell all your stocks during an election year unless you have a reason to. So thanks a lot. Have a good day.

The content of this video is developed from sources believed to provide accurate information. The information is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation. All expressions of opinion are subject to change. This content is distributed for informational purposes only, and is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products or services. Past performance is not a guarantee of future results. Index performance does not reflect the expenses associated with the management of an actual portfolio.

Castlepoint Wealth Advisors | Oklahoma Wealth Advisors | Jake Weatherford - Partner & Advisor

Jake Weatherford, CFP®, MBA

Partner & Advisor at Castlepoint Wealth Advisors

Jake Weatherford is a Partner and Senior Advisor for Castlepoint Wealth Advisors, an Independent Wealth Management firm in Oklahoma City. He is responsible for providing client investment advice and implementing the firm’s financial planning strategies. Jake is also responsible for portfolio modeling and financial projections, which help our clients evaluate potential outcomes of their decisions.

Read more Jake’s Take blog posts and articles.