Economic Commentary – What Does The Election Mean?

We’ve all been through a bruising election season, and emotions are running high on all sides of this election’s various debates. As readers of these economic commentaries know – but it bears repeating – our only goal is to provide objective and meaningful information on the economy and investment markets, which allows our clients to make the best possible decisions regarding their investment and financial goals.

Historical Observations

In light of the depth of the concerns about what this election means, let’s start with an overview of how elections have impacted the markets in the past. Below is a chart showing the progress of the S&P 500 over the last 70+ years. That time period encapsulates both Republican and Democratic presidencies. Coincidentally, there are five broad “red” periods and five broad “blue” periods, so this is a good test of what our quintessential American changing of the guard means.

The biggest takeaway is that the economy’s broad direction remains generally upward regardless of the election cycles.

Each party’s time at the helm has seen its share of relatively calm markets, downturns, and recoveries. While it’s tempting to get into the weeds about what caused each downturn and then what caused the subsequent recovery, that conversation right now would distract from the more important lesson.

We are blessed to live in a country that has thus far, in its almost 250-year history, remained true to its democratic traditions and self-corrective mechanisms. When either party has blundered – and each one has, several times in fact over our history – the system allows the voters to discipline and correct our leadership by voting for change.

We should also pay attention to the fact made clear in the chart above that each broad “red” and “blue” period has seen a market high. Each of these market highs has eventually been followed by another market high greater than the last one.

Are there downturns, corrections, and recessions in between? Of course, and there most likely will be going forward. But this long, broad, upward trend in our markets means that we should not be concerned by the heights we achieve as if they somehow signal that a fall is inevitable.

Sometimes, market highs are immediately followed by other market highs.

Sometimes, market highs are followed by a correction, and the next recovery takes a while to develop and play out.

The point is that we will never know which pattern will play out at any point in time. This year, after the election we’ve just weathered, the only guarantee is that we will see both.

Can We Time This?

Should we try to time it? Should we try to figure out whether there will be a “down” before there’s another “up,” or whether we’re immediately going to have another “up”?

History teaches us that attempts to time the market fail because of the very slim margin for error. The chart below is representative of similar charts and graphs which have been compiled over the decades. This one looks at the period from 2003 through 2022, but other studies of other 20-year periods at other times in our country’s history have shown remarkably consistent results.

To time the market and succeed, you have to be right roughly 98% to 99.5% of the time. In other words, the error margin seems to be between 0.5% and 1.1%. How is that determined? Here’s how.

Value of $10,000 Invested in S&P 500, Jan 2003 – Dec 2022

In this chart, the green boxes show how $10,000 would have grown over these 20 years if an investor had been in the market over various periods within those 20 years. The gray boxes show the growth an investor would have missed.

Being invested in the market for all 5,040 trading days in this 20-year period would have grown $10,000 to $64,844. If an investor had tried to time the market and missed the best trading days, look what happened:

Missing the 10 best trading days means $35,136 of growth is missed.
Missing the 30 best trading days means $53,143 of growth is missed.

The orange line represents break-even; that means the investor would at least keep their $10,000.

Notice that missing just 40 of the best trading days represents a real loss of principle, and missing 60 would have been devastating.

60 trading days represent only 1.1% of the total trading days in this 20-year period.
30 days – which is barely break-even – represents 0.5%.

The margin of error for marketing timing to work is somewhere between 0.5% and 1.1% based on this study, which is the typical finding of the other studies done during different 20-year periods.

Consistency Wins

These two charts together make one of the strongest arguments we can make for being broadly and consistently invested in stocks. That doesn’t mean you should put your entire portfolio or life’s savings into stocks. There are important investment allocation issues that determine how much to invest in stocks vs. how much to invest in bonds.

However, once a proper allocation analysis has been conducted, whatever amount is allocated to stocks should be consistently and broadly maintained regardless of who occupies the White House.

Elections Are Not Policy

This commentary is not expressing any opinion about what the election results mean for the economy despite the winner’s many pronouncements and campaign promises, which we could review. Nor would we have expressed an opinion if the other candidate had one. The reason is very simple.

Pronouncements and campaign promises are not the same as policy. Even policy proposals are not the same as policy. Policy results from the negotiations between and within each of our government divisions. The White House, the Senate, and the House of Representatives must negotiate with the other divisions to pass any major policy. And even within each division, there are negotiations on what the policy should be.

As policies are developed and put forward with details that can be analyzed, we will – as we always have – review the prospects for the broad economy and the markets. And indeed, the history of our economic commentaries shows that we have tackled a wide variety of issues over our firm’s 45+ year history.

There is much to be thankful for this post-election holiday season. Once again, we are witnessing the peaceful transfer of power in one of the most powerful countries on earth. Looking over the millennia of recorded history, that is unique, and we should be grateful that this system has allowed our economy to prosper and grow. We have no doubt that there will be many future successes down the road, just as we are sure there will be interim setbacks and corrections along the way.

Investment Implications

Assuming both will occur – the long-term upward trajectory with volatile interludes along the way – allows us to design portfolios that will thrive and allow investors to achieve their financial goals and dreams. We know that downturns will occur, and so will recoveries. We plan for them without knowing exactly when they will occur. For portfolios designed this way, the best action now is to stay the course.

Executive Summary

It has been a very emotional election season, and many people remain concerned and anxious. But the reality of what this election means for our economy and markets is less dire than imagined or claimed by some. The reality is that Republicans and Democrats have traded seasons in power relatively evenly over the last 70+ years, and yet, the long-term trajectory of our economy and markets has remained remarkably consistent. By acknowledging that these patterns will repeat, even without knowing exactly when they will repeat, we can design portfolios that will thrive over the long term and help investors achieve their financial goals.

First Financial Consulting

Financial Guide

Understanding
Annuities
Download