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2020 has been a year filled with uncertainty. From a global pandemic to heated political contention, this year has left the nation spinning about what will happen next. Amidst all this unrest, the most significant presidential election in modern American history is taking place in a week, Trump versus Biden. This year’s election dominates every network cycle and newspaper headline detailing the supposed predicated effects the results will have on the economy. Any financial investor too glued to their television may begin to question their investment strategies. This reality naturally begs the question, “How much do elections impact individual portfolios?” The truth is elections matter but not so much to your investments.
Elections Matter (But not so much to your investments)
Despite what the news cycles spout daily, A lengthy history of empirical research paints a different picture. Vanguard recently published a study regarding the stock market history concerning presidential elections. The first question posed was whether market returns change drastically during an election year. The graph below maps out market returns from the year 1860 to 2010. The average return difference between election years and nonelection years is a measly .8%.
Markets Ignore Election Years
The following question was how volatile the market gets in the months leading up to the election. Based on headlines and overall social reactions, one would assume the market becomes highly volatile as the election comes closer. In actuality, the results are quite the opposite. The graph below shows the S&P 500’s volatility 100 days before and after the election. Believe it or not, the volatility was 13.8% both 100 days before and after. Truth be told, markets tend to ignore elections.
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Need more convincing?
Read this perspective from Dimensional Fund Advisors to see how much impact a President has on stocks.
Returns Graphic: Vanguard calculations, based on data from Global Financial Data as of December 31, 2019. Data represents the 60% GFD US-100 Index and 40% GFD US Bond Index, as calculated by historical data provider Global Financial Data. The GFD US-100 Index includes the top 25 companies from 1825 to 1850, the top 50 companies from 1850 to 1900, and the top 100 companies by capitalization from 1900 to the present. In January of each year, the largest companies in the United States are ranked by capitalization, and the largest companies are chosen to be part of the index for that year. The next year, a new list is created and it is chain-linked to the previous year’s index. The index is capitalization-weighted, and both price and return indices are calculated. The GFD US Bond Index uses the U.S. government bond closest to a 10-year maturity without exceeding 10 years from 1786 until 1941 and the Federal Reserve’s 10-year constant maturity yield beginning in 1941. Each month, changes in the price of the underlying bond are calculated to determine any capital gain or loss. The index assumes a laddered portfolio that pays interest on a monthly basis.
Volatility Graphic: Vanguard calculations of S&P 500 Index daily return volatility from January 1, 1964, through December 31, 2019, based on data from Thomson Reuters. Note: Past performance is no guarantee of future returns. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.
Past performance is no guarantee of future returns. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index. All investing is subject to risk, including possible loss of principal. Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income. Diversification does not ensure a profit or protect against a loss. Investments in bonds are subject to interest rate, credit, and inflation risk.