Yes, It’s An Election Year – But Markets Don’t Play Politics

Why are long-term investors wise to tune out the political noise during election cycles?

Laurence Hale, AAMS®, CRPS® explains. 

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Welcome to You and Your Money. Empowering you to reach your goals with tips to help you Plan Well, Invest Well and Live Well. Joining us today is Laurence Hale, principal, managing partner and chief investment officer at Weiss, Hale and Zahansky Strategic Wealth Advisors. Now, let's dive into today's topic as we head into the 2024 presidential election, how can we expect the election to impact the stock market? Well, it's you know, Wayne, it's a common misperception that elections have a major effect on the markets. And the reality is history shows that the stock markets really party agnostic. So regardless of whether it's a Republican or a Democrat or maybe even a third party that that's elected, market tends to rise over the long term. So in other words, the election has no effect on it whatsoever. Well, you know, it definitely can have some volatility and keep people on their toes, but it does not necessarily indicate that the market is going to go up or down or sideways. And if you look over the, you know, the long term markets have moved up. And according to some data from Capital Group, the S&P 500 only declined in two of the last 20 election years. And those election years or the year 2000 and 2008. And the reason for the declines in those years really were attributed to asset bubbles, not the elections themselves. What is an asset bubble? So think of an asset bubble as, you know, valuations getting stretched. So you go back to the financial crisis in 2008. You know that was prices of homes rising at a rate that was unsustainable being, you know, buoyed by cheap money and easy lending policy, among many other things. And when you look back to 2000, that was really the dot com crisis. Think of any company that had .com at the end of it, you know, for those younger viewers, you may have never, never not been in an era of the internet, but that was the advent of the internet. And, and people were, going bonkers over, the prospects of the internet. And a lot of those companies really had no earnings, despite their prices being bid up. And that wasn't sustainable as well. So, in other words, the president's party affiliation does not seem to matter much when it comes to market performance. Exactly. I mean, it may not feel that way, but the stock market markets post election returns, seem to have much more to do with whether the market is over or undervalued at the start of the term, of the president, rather than what political party they're affiliated with. So it sounds like external economic factors play a bigger role than the elections themselves. What about volatility levels? Do we typically see higher volatility in election years compared to non election years? We do. And that you know I think is what people often perceive as as the market performance. You know volatility most people think of as the market going down markets when they're in higher levels of volatility can go down and up. but we do tend to see higher volatility in the first half of election years as uncertainty around policies and the eventual winner increases. So however, volatility doesn't necessarily translate into negative returns. And the markets actually perform better in the second half of the election year on average. So it could even potentially present an opportunity.? Absolutely. You know, when the we view periods of increased volatility as often chances to buy stocks at a discount, think about the stock market going on sale. If it's down, it's essential for investors to maintain a long term view and really not get caught up in the short term noise of an election cycle. Laurence, you went to Fenway Park on the Patriots Day game. I would like you to share with our listeners the story of where you parked for that game on Monday. Well, Wayne, it was a great day to watch a baseball game and a marathon, but, not a great place to, to find parking. We ended up going to the same lot we typically do, right in Kenmore Square, off Comm Ave and pulled in. And obviously the race runs right through that area. So there were tons of police officers, keeping everyone safe and organized. And we were driving six six of us went up to the game in a big black suburban parking lot full of police. That was about 20 BPD motorcycles in there, and a plainclothes police officer stops us as we come in and wonders who we are. And says, you can't park here. And he thought we were the feds driving in a big, in a big black suburban, you know, had had a great experience with one of Boston's finest and ended up having to find new parking and had a great day watching the game. I love that story. Did you get a chance to see the marathon? We were up there. Is it all baseball? It was all baseball. We were in the stadium, before start and stayed until the bitter end, which unfortunately did not result in a win for the Sox. I recall they lost on Patriot's Day. All right, markets don't play politics with Laurence Hale this morning. Were you saying before the break that investors shouldn't panic and sell when the market gets rocky during an election year. Exactly. you know, Wayne, history shows that investors who stay invested and maintain a long term horizon always come out ahead, even when they started investing during challenging times, like the bursting of the tech bubble in 2000 or the housing crisis in 2008. Those are good points to keep in mind. And let's talk about the role of diversification during volatile periods. How important is having a diversified portfolio when navigating election years? Well, this is, you know, a crucial point. Diversification is an incredibly important part of managing risk. And that's not just for election years, but really at all time. So diversification is really spreading your investments across different asset classes, sectors, geographies. And that can help investors mitigate portfolio risk. Think think of the phrase don't put all your eggs in one basket. So well diversified portfolio can can help buffer, against any short term swings that we could see in an asset class or sector due to election rhetoric or policies. And, you know, we take a long term strategic approach with our own clients. And because, you know, based on sound economic, data that over the long term it's much better to stay invested. Now, if your time horizon is really short, let's say you're planning to retire in the next year or two. Then you may want to take a different tack to minimize risk, depending on how the market's doing and what's happening in the world overall. But it's really, you know, situation and goal dependent. And that's why it's so important to make sure you have a personalized, and strategic financial plan and portfolio that matches that plan. Does diversification include international investments? It often does. You know, there are, believe it or not, more than half of the publicly traded stocks are outside of the United States. markets are huge. If you think about the bonds that are issued by other countries, companies overseas. and then you've got other things like currencies and commodities. So, you know, there's always something that, you know, in the US, people call home country bias. You know, people know and want to invest in things that they know. But, you know, even if you're just sticking with U.S. investments, oftentimes the companies that you're investing in are doing business globally. They may be selling or buying from, Europe, from Asia, from the Far East. So, investing globally, you know, can add a lot of layers of diversification and some great opportunities as well. But when you talk about diversification, aren't you also speaking, you just use the phrase bonds a couple of times. Diversify with stocks and bonds. Don't put your eggs in one basket with just stocks. Exactly. You know it. That bonds play a role in portfolios. They often will be used to manage risk and generate income. You know, stocks typically are viewed more for a growth oriented purposes but do have a much higher level of risk. And there are ways to invest in in stocks and bonds, that even further diversify. So think of things like mutual funds, exchange traded funds that are baskets of stocks and bonds. So you're getting really a fully diversified portfolio, of stocks or bonds often when you're investing in those types of vehicles. But of course, you want to understand the risks before you make any sort of investment decision and build a portfolio that that really aligns to what your long term goals and plans are. That makes perfect sense. Now, let's say you're not one of those people with such a short time horizon to cash in on or rely on your investments. Could you give us some specific examples of how staying invested has paid off in the long run before? Sure. you know that that Capital Group data shows that money invested at the beginning of each of the past 20 election years and held for the subsequent ten years, has always grown. So that's looking over the last 20 presidential election cycles, investing for ten years, and every single instance over that ten year period. that money has grown. In fact, in 18 of those 20 periods. Investors have actually doubled their money by the end of the decade. But that is a long term horizon. So it's not not investing in the short run. We're talking ten year periods and staying invested despite volatility. Are there cases where as we sit seven months out from a presidential election, that it might make sense to wait until after the election to see how things turn out, rather than invest in a particular stock bond or whatever now? You know, often that delaying can have worse results. And it definitely is something that you, don't want to wait to implement a long term strategy. There are different techniques and ways that you can invest over time. But if you try to time the market, you know, research has showed us that, if those investors, you know, holding off on investing until after the elections ended or have ended up with lower returns compared to those who stayed invested throughout. So data shows us don't wait. And and we would say from our experience, that is definitely the case. Is there something to be said for staying the course and not trying to time the market like I just spoke about, especially during election years? Yeah. You know, trying to time the market's a losing proposition. You know, you need to be right multiple times. You need to be right on when you buy an investment and when you sell an investment. And there are a lot of, sort of psychological, mistakes people can make. You know, think about, if you pick a winning investment that makes you money, you may think I've got great skill, and that means every investment I'm going to make is going to be a great one. And that's definitely not the case. If you look at, historically, strong investors, you know, I think Warren Buffett and those types of folks, they're buying companies that they have no intention of selling, and they're doing it based on some fundamental understanding of the company, of their financials, of the market, of their their market position. And those are, you know, not timing the market those are investors who are really looking at buying good investments and staying with them through thick or thin. But at the same time, on an individual basis, you need to make sure that your overall strategy and plan allows you to make investments that you can stick with over that long period of time to see the positive results. Story out of the news this week, Laurence, was that while inflation has come down significantly in the last couple of years, there are still some things that cost a lot more than they did a couple of years ago and the attorney general, William Tong, made a statement saying that some price gouging involved in that. That some of the places raised their prices and never brought them down, even though things aren't costing the businesses that much. I wonder what you thought about that and about the, in fact, the impact that has on the markets. You know, inflation is definitely, you know, a challenge. And I think a lot of people, I just had a conversation with a client yesterday about inflation, and you know, don't forget that inflation sort of compounds on itself. So even though inflation has moderated considerably, you know, down to, I think 3.8% on, on core CPI as of the last print last week. you know, we're still dealing with the higher inflation from a couple of years ago. So when people are going to the grocery store or, you know, purchasing, different, items or services, you know, they're seeing very different prices than they saw about five years ago. Even though inflation is definitely a lot more moderate, and one of the Fed's, dual mandates is is to maintain inflation around a roughly 2.5% target, as well as keep unemployment in a acceptable range, usually below 4%. and, you know, that's a battle they're fighting. And, and that's one of the reasons why they're anticipating delaying any reduction in interest rates. So, you know, a lot of it has to do with with where you're looking, you know, commodity prices. I know a lot of folks are saying hey gas prices are a lot higher. Well, they're higher than they were in December, but they're pretty much the same place they were a year ago. So a lot of it has to do with, you know, your perspective, what time period you're looking over. But there's no doubt we're paying more for many goods and services than we were five years ago. Good point. I was gonna bring that up next. And that's the recent small spike in the price of gas. What is the effect of the price of gas, high or low, on the market in general and on inflation inflation in general? Well, you know, commodities over the last, you know, 5 or 6 months or so, particularly as there's been conflict in the Middle East and that's been a bit of an unknown. Commodities, particularly oil, have been buffeted around, although it appears that even though the main players in, in the conflict in Israel and Gaza, don't, you know, they're not oil producers, that the concern is that things may spill out into that greater region, which is a major oil producer for the world. You know, at the same time the US productions increased, so there's more domestic oil production happening, so that that insulates us a little bit. As well as, you know, we saw that, you know, this tragic conflict that continues to rage over there, potentially widening over the weekend. And, and really, it seemed to be somewhat of a non-issue and and contained because that conflict with Israel and Iran has really been going on under the surface for many, many years. Laurence heard you say buffeted around. Was that a pun? You know, we like to joke every once in a while, but, I I'll, I'll take credit for that pun. Warren Buffett, that's the reference is there. As we wrap things up, any final thoughts or advice for investors navigating the upcoming election season? You know, Wayne, my advice would be to keep calm and carry on with your long term investment plan. So don't get caught up in the political noise or try to outsmart the market. You know, when we look at the historical data, it shows us that investors who remain disciplined and focused on their goals are often rewarded for their patience. And we believe that wholeheartedly. Laurence, good talking to you this morning. Thanks for joining me today. Great. Wayne. It's always a pleasure. Laurence Hale, our guest this morning. If you’re seeking experienced guidance for your own investments and financial plan. Get in touch with Laurence and the rest of the team at Weiss, Hale and Zahansky Strategic Financial Advisors. And you can request a complimentary consultation on their website whzwealth.com. Or you can give them a call(860) 928-2341. As always, thanks for listening to You and Your Money. Find even more episodes, videos and other resources at our website whzwealth.com. Weiss, Hale and Zahansky Strategic Wealth Advisors offer securities and advisory services through Commonwealth Financial Network, member FINRA/SIPC, a registered investment advisor. Fixed insurance products and services offered through CES Insurance Agency. They practice at 697 PomfretSt, Pomfret Center, Connecticut, 06259. And can be reached at (860) 928-2341. Weiss, Hale and Zahansky Strategic Wealth Advisors do not provide legal or tax advice.The financial services team strive to support clients in achieving their financial life goals. For more information regarding wealth management, customized financial planning with Weiss, Hale and Zahansky Strategic Wealth Advisors, please visit www.whzwealth.com.