Last week in the rotunda room at the Tobin Center for the Performing Arts, South Texas Money Management (STMM) partnered with the professional accounting and legal services firms BDO and Dykema Cox Smith to address issues regarding the coming presidential election.
STMM handled the investing part, with Jeanie Wyatt moderating a panel discussion. The coalition first polled the audience regarding election-related investing trivia, and then dug deeper into the facts at hand.
With respect to the polling questions, the majority of respondents expected Hillary Clinton to win the presidential election, which is consistent with most models. For example, Pollyvote – a model created by Wharton’s Jon Scott Armstrong that combines several forecasting methods such as polling data, econometric models, betting or “prediction” markets, and more – currently gives Clinton a 52.3% chance of winning the popular vote versus 47.7% for Donald Trump. The model updates more or less continuously, so users can search Pollyvote and get a credible measure of expected election outcomes in an instant.
Most of the respondents felt that Republicans would retain control of Congress, a continuation of the status quo. When asked which president had the strongest stock market during his first year in office, most thought it was Ronald Reagan, but it was actually Franklin Roosevelt. When asked which president presided over the second strongest stock market during his first year in office, most guessed correctly that it was Barack Obama.
Some Basic Facts on Stocks and Bonds
Overall, throughout the 88 years of investment returns since 1928, stocks – or S&P 500 – have generated positive total returns in 64 years and negative returns in 24 years. Bonds – or 10-year treasury bonds – generated positive total returns in 72 years and negative returns in 16 years.
How many years were negative for both stocks and bonds? Only three out of 88, or just more than 3% of the time. So a balanced portfolio of stocks and bonds would in fact have been very stable. Compare that with gold, for example, which is widely viewed to be a stable store of wealth. Gold has had declines of 10% or more at least five times since the Great Recession in 2007-09 alone.
From its peak in 2007 to its trough at the end of last year, gold lost 42% of its value, so the idea that gold is a stable store of value is patently false. At one point during the 2007-09 crisis, gold declined over 48% peak-to-trough, so the idea that gold is always a safe asset in times of severe crisis is also false. Gold can play a role in investing from time to time, but it is important to have a fact-based rather than a story-based view of gold.
Investing and Elections
According to Bloomberg, and based on research by Strategas, going back 22 elections to 1928, the S&P 500 market has correctly predicted the presidential election 88% of the time.
“Correctly predicted” means that when the market is up three months prior to the election the incumbent party wins, and when the market is down three months prior to the election, the incumbent party loses. So far the market is down about 2% going into the three month period, which would suggest a Republican win by that logic.
Stock market performance during election years has historically been slightly below average, and during the year after as well, but almost insignificantly so. It is true that stocks have done better in election years when Republicans won compared to when Democrats won, but the markets have basically flip-flopped the following year, with low returns for Republicans and strong returns for Democrats.
Stocks also have done better in total – taking all years into account – under Democratic leadership than under Republican reign, a conclusion largely driven by the stock market crashes of 1929-32 and 2007-09, which both occurred during Republican administrations, as well as the strong rebound years in 1933 and 2009 which occurred under Democratic administrations.
Taking the research back to the 1800s pretty much eliminates any pattern, but the stock market data in those earlier years is not as useful because it reflects only a handful of companies. Interestingly, according to data provided by Crandall Pierce & Company, stocks tend to perform above average when Republicans control Congress, regardless of which party is in the White House.
But the key conclusion, which is supported by more rigorous inferential statistical analysis – as opposed to descriptive statistics, which were just given – is that the statistical relationship between elections and returns is almost zero. There simply aren’t enough data points. The exceptions are too numerous to make meaningful conjectures of. Nothing in the analysis of stock and bond market returns and elections would merit a deviation from a well thought out long-term investment plan.
