In just a few months in the United States not only the presidency will be up for grabs, but also many seats in the House and Senate. The results in all three areas could vastly change the political and legislative landscape in America. While recent polls have made things a bit clearer in terms of what the outcome might be, there is a lot of time left before November and, at this point, anything might happen. In short, there is a great deal of political uncertainty right now.
Generally, uncertainty is very bad for markets. Investors like to plan in an environment where they feel confident that they know how things will be over at least the medium term. The interesting thing at this point is that even though there is much political uncertainty, that uncertainty has not migrated to market sentiment.
The VIX index (often referred to as the “fear index”) and a measure of market volatility is at historically low levels. After a spike up over a couple of days as a result of the Brexit outcome, it has dropped precipitously. Market complacency such as we are seeing now is a rare occurrence. What that tells me is that, in general, investors are not at all “spooked” by-election outcome concerns. While in theory this seems a little strange, if we look at history it can be fairly easily explained. So let’s dispense with theory for a moment and have a look at presidential election year history.
History shows that stocks actually do not weaken as the election date draws near. Clearly markets are constantly digesting much, much more than general election factors. There is China, there is Brexit, and there is the Fed. The election is clearly important, but it is just one piece of the performance puzzle. Have a look at the following two charts, which look at election years since 1928.
Average Election Year Returns for the S&P 500
Source: Global Financial Data, as of 5/13/2016. Average cumulative S&P 500 total return in election years since 1928.
S&P 500’s Median Monthly Returns During Election Years
Source: Global Financial Data, as of 5/10/2016. S&P 500 Total Return Index during presidential election years since 1928.
What are the four most dangerous words in investing? Let me suggest to you that they are “it’s different this time.” That is what many political commentators are saying about this year’s presidential election. And they are right from a political point of view. But as was pointed out at the beginning of this piece, the market seems not to care very much about the political niceties of the campaign, or indeed about the candidates. Can the results of this year’s election trigger a bear market? While anything is possible, historically presidential election years are usually positive. Looking at recent years, 2000 and 2008 were exceptions. But those markets were reacting not to the election, but to the bursting of the tech bubble and the “great recession” respectively. There would seem to be nothing of that magnitude on the near term horizon at this point.
In a piece published on May 13, 2016, Fisher Investments noted that historically, U.S. stocks have risen 82% of the time during presidential election years since 1928. The average return during those years has been 11.1%. It’s likely that the reason for this is that pre-election, politicians are “talking the talk.” Post-election, they are “walking the walk.” It is the latter that sometimes causes markets to move significantly. Talking about policy doesn’t do much. Enacting legislation can. We cannot possibly predict what may happen after the election in terms of policy. But it does seem likely that uncertainly with respect to the outcome of the election will fall as election day approaches.
President, HG Partners Limited
Director, Private Client Group,
Senior Financial Advisor, HollisWealth Advisory Services Inc.
This article was prepared solely by Howard Goodman who is a registered representative of HollisWealth Advisory Services Inc. (a member of the Mutual Fund Dealers Association of Canada and the MFDA Investor Protection Corporation). The views and opinions, including any recommendations, expressed in this article are those of Howard Goodman alone and they are not those of HollisWealth Advisory Services Inc. HollisWealth is a trade name of HollisWealth Advisory Services Inc. ® Registered trademark of The Bank of Nova Scotia, used under license. HG Partners Limited is an independent company. Scotiabank companies have no liability for activities outside of HollisWealth.