This year is when we elect a new president. This could potentially impact your 401(k).
An examination conducted by pension fund TIAA recently focused on a moderate-risk portfolio consisting of 60% equities and 40% bonds, evaluating the performance in presidential election years since 1928. If you take a look at the results, only four years witnessed negative returns: 1932 (a decline of 1.4%), 1940 (a decline of 4.7%), 2000 (a decline of 0.8%), and 2008 (a decline of 20.1%).
Unsurprisingly, these four presidential election years coincided with massive historical events: The Great Depression, World War II, the bursting of the tech bubble, and the housing and financial crisis that resulted in the Great Recession.
Despite these negative returns, when analyzing the long-term average performance, TIAA discovered that a 60/40 portfolio delivered an average annual return of 8.7% across the 24 presidential election years since 1928, slightly higher than the 8.5% average return for the same portfolio in non-election years.
Niladri Mukherjee, the chief investment officer at TIAA, commented, "Over time, these negative returns are washed-out."
To be honest, not many investors are able to maintain both their portfolio and original stock-to-bond ratio for such an extended period.
Even if we take a closer look at shorter time frames and just focus on equities, it appears the same pattern exists. The S&P 500 has generated an average return of 7% during presidential election years since 1952 as per LPL Financial. When we limit this to presidential election years with the incumbent president running for reelection, the average return significantly increases to 12.2%.
Jeff Buchbinder, the chief equity strategist at LPL, asserted in a December 2023 blog post that this pattern primarily results from the incumbent government taking steps ahead of the election with the intention of staving off potential recessions and stimulating job growth.
Now, for this election year, it's hard to predict the immediate market reaction regardless of who wins. Mukherjee pointed out that "Election years have higher levels of volatility."
Moreover, estimating the long-term effects on the markets can be even more challenging. While history may provide a rough guideline, how various factors like economic growth, corporate profits, inflation, standards of living, productivity, and geopolitical tensions play out later on are difficult to foresee.
In plain terms, the fundamentals of economic growth, corporate profits, inflation, standard of living, and productivity will continue to shape the markets.
The United States and worldwide economic and inflation trends have proven to be more consistent indicators of market returns as opposed to election results, according to analysts from US Bank in a recent report. Additionally, the composition of Congress plays a crucial role in shaping fiscal policies and implementing changes.
In summary, playing it safe by diversifying your portfolio across different asset classes and sectors while conservatively investing funds needed in a few years is the time-honored advice, Mukherjee recommended. If you're uncertain about the election's impact on markets or convinced they'll react in a specific manner depending on the winner, he urges you not to rely on your predictions for investment decisions. Instead, he suggests consulting with a financial advisor to ensure your existing allocations align with your timeline, risk tolerance, and goals. Otherwise, just stay put.
Moreover, it would be beneficial to apply some suggestions from psychologist Daniel Crosby, the author of "The Behavioral Investor," who cautions against investing impulsively based on your fears or enthusiasm. In these scenarios, you may sell indiscriminately or take on excessive risk in investments.
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In light of the historical data, a well-diversified portfolio with a 60/40 balance of equities and bonds often leads to successful investment returns during presidential election years. Despite the occasional market volatility, the long-term average annual return for such a portfolio exceeds non-election years, proving to be a profitable business venture.
Source: edition.cnn.com
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