Portfolio performance under Trump or Clinton: Clients should stay in the market
The anxiety over a Clinton or Trump presidency is evident in a report released this month by BlackRock, which surveyed 1,633 Americans, 1,440 of them investors. Three-quarters of respondents feel the election will have a bigger impact on their finances than the 2008 election, the last time an incumbent wasn’t running for president.
A host of other surveys suggest these fears are significant enough to drive investors out of the market entirely. For example, a UBS survey of 2,200 high-net-worth individuals found 30% already have pulled out of the stock market or are considering doing so. In another study, over 60% of readers responded to a survey by the Tampa Bay Business Journal saying they are waiting to make investment decisions, whether for themselves or their businesses, until after the election.
While the market seems to be on pace for delivering typical annual returns, (the S&P 500 was up 7.84% through Q3), volatility has increased to historic levels in the lead up to Election Day. However, as important and emotional as this election seems to be, history tells us two things: First that the spike in volatility is likely to be short-term and second, that the winning party and their policies will have minimal impact on market returns.
An examination of stock market performance for both Republican and Democratic administrations over the period 1951 to 2015 illustrates this point. Among the 10 administrations during this 65-year period, eight election years generated double-digit average market returns, one had a single-digit return and the last a near-zero return. The latter was the administration of George W. Bush, which encompassed both the last two years of the dot-com bubble bursting as well as the financial crisis of 2008.
So, 90% of the reporting years, where presidents of varying skill were elected, generated attractive returns. The bottom line is that the U.S. economy and markets are resilient, performing well despite who is leading the country.
DON'T PRESS PAUSE
The temptation clients may have to to pause on investing is not surprising given the volatility early this year and the surprise Brexit vote in June. Market uncertainty is expected to elevate around elections and neither markets nor investors like uncertainty. For many, this is enough to drive them out of the market.
Such behavior, where the intent is to reenter the market at a more optimal time, presents a real risk to long-term performance. It is very difficult to short-term time the market.
Consider a recent example: the U.K. Brexit vote. If a client sold following the big drop that occurred after the election and was a couple of days late getting back in, they likely missed out on a big rebound. So, the client ended up with the worst of both worlds: a big loss followed by the disappointment of missing a strong recovery. Both drawdowns and recoveries happen suddenly, with the recovery often close on the heels of the drawdown, when emotions are still raw.
Keep in mind that the country won’t know which policies will be implemented by the winning candidate for some time, and what sort of compromises will be necessary in order to pass legislation. So, hitting the pause button based on a client's political emotions may mean sitting on the sidelines for some time.
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CHOOSE THE RIGHT PASSION
Shortly the country will learn who will be president for the next four years. Clients aren’t wrong to focus on the election since voters' choices will determine policy direction. But no matter how riled up they are about one or both of the main candidates, as an investor, it pays to take a more dispassionate view regarding a portfolio. History shows that passion for or against a candidate is misplaced when making investment decisions.
Clients should let that passion drive them to the polls, but not drive them out of the stock market.