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Financial Planning magazine posed the following question to 320 financial advisors: ”How will the U.S. election outcome influence retirement planning, and what steps are you currently taking?” The responses revealed that a stunning nine out of 10 advisors anticipated a lasting negative impact on their clients’ portfolios. Some were advising clients to divest from equities and increase cash positions in anticipation of the election. One expressed concern that, with equity markets near all-time highs, the uncertainty surrounding our future president is a significant factor.
The survey perfectly frames the dramatic 2024 election climate—yet it ran on September 13, 2016. At that time it seemed inevitable that Hillary Clinton would be the next president, to the dismay of Trump supporters, especially those who bailed out of the market assuming she would win. Instead, Trump won. In 2020, polls prior to the election indicated Biden would win, which he did. Again, some Trump supporters bailed out of the markets, to the detriment of their financial wellbeing.
Basically, the majority of advisors responding to the 2016 survey were acting out what the average client was thinking: “When things look rocky, let’s bail out.” This was not good news for their clients. I contend that one of the biggest values in having a financial planner is keeping you in the markets during downturns. Those advisors whose own political anxiety and fear led them to convince their clients to bail out failed those clients.
The more strongly people buy into the rhetoric of their political parties, the more difficult it is to be pragmatic about their investments. I’ve witnessed this play out every four years when we elect a president. Without fail, a handful of people become fearful of an economic Armageddon if who they view as the “wrong” presidential candidate will win or the “wrong” party will take control of Congress. They typically want to liquidate their portfolios ahead of the political and economic disaster that will undoubtedly unfold and wait safely on the sidelines until “things are better” before jumping back in.
In both 2016 and 2020, I encouraged everyone, regardless of their political affiliation, to stay the course. Some reacted to this advice as if I had lost my mind.
Yet if past events are any indication, the stock market tends to go up if there is either a Republican or Democratic sweep of the presidency and Congress. Rarely, if ever, do events unfold in the way investors fear.
In 2016, much to the chagrin of Hillary Clinton’s supporters, the Dow Jones Index increased 6.8% between election day and Trump’s inauguration day. The market continued to rise a total of 19.13% between Trump’s election and the next presidential election day.
In 2020, much to the shock of Trump supporters, the Dow rose 30.5% between election day and Biden’s inauguration day. Since his election, it is up 22.46%. Neither election brought the lasting negative economic impact on client’s portfolios that 9 out of 10 advisors feared in 2016.
These observations highlight the unpredictability of stock market reactions to political events. Despite fears and uncertainties surrounding elections, the data underscores the importance of maintaining a long-term perspective in retirement planning and avoiding knee-jerk reactions based on political beliefs. It also shows that attempting to time the market based on election outcomes can lead to missed opportunities and financial losses.
The lessons from 2016 and 2020 remain pertinent as we approach the 2024 election. Despite short-term market swings, bear markets have a probability of happening in the first 18 months of any president’s four-year term. Ultimately, as I repeat every four years, the best way to election-proof your portfolio is to leave it alone.
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