History suggests waiting until a new president's policies take shape hinders rather than helps long-term results.
by Brian Levitt, Invesco Global Market Strategist
I was recently giving my usual spiel to clients about the importance of staying the course with their investments throughout the election season and irrespective of who ultimately wins the presidency. To illustrate that, let’s consider how stocks, as measured by the Dow Jones Industrial Average, have performed since Dow was established in 1896. A hypothetical $100 investment in the Dow would have been worth over $68,378 by the end of the second quarter of 2020.1 That gives us a good, large sample size to examine what the results would have been if investments were made only when one political party occupied the White House. In both cases – regardless of whether investments were made only when Democrat or a Republican was in power – the returns over that time frame would have been diminished to a few thousand dollars (just over $4,000 and $1,500 for Democrats and Republicans, respectively.2 I had used that chart throughout much of my career to make the case that you shouldn’t let politics influence whether you stay invested. During my recent presentation, though, a client respectfully informed me that my premise might not be entirely well-grounded.
Figure 1: Historically, investors have been better off staying full invested
Growth of $100 in the Dow Jones Industrial Average from 1896 through 6/30 /20 for a fully invested portfolio vs. those invested only when a Democrat or Republican was in office.
This seasoned financial advisor reasoned that his investors were not looking to sit out of the markets for the entire four or eight years of a Republican or Democratic administration. Rather, his anecdotal evidence, based on his numerous conversations with clients, suggested his investors were looking to sit out roughly the first 100 days of a new administration. The idea would be to provide time to allow the market to respond to any potential uncertainty around new policy proposals or potential legislative accomplishments.
He asked that I alter the analysis to demonstrate whether investors fare better or worse by avoiding the first 100 days of a new presidential term. I was certain of what the data would tell me, and the numbers didn’t disappoint. As always, it is the time in the market that matters.
Again, let’s use a long time frame to have a statistically relevant sample size. If you go back to the day in 1957 when the S&P 500 Index went live, you’ll find a hypothetical $10,000 investment in the index until the end of August 2020 climbed to $790,000.3 Investment portfolios that avoided the first 100 days after each of the inaugurations climbed to only $426,000.4 By way of example, missing the first 100 days of the Obama administration, in which the S&P 500 Index climbed by 16% during the nascent economic recovery out of the global financial crisis, would have brought a large opportunity cost for portfolios.5 The S&P 500 Index also climbed 8% in the 100 days after Donald Trump took the oath of office.6
Figure: 2 Missing the first 100 days of an administration would bring significant long-term losses
Growth of a $10,000 investment in the S&P 500 staying fully invested since 1957 vs. missing the first 100 days of each new president’s term.
I reported the results, and the advisor was appreciative of the analysis but felt that going back to 1957 was unnecessary. He instead asked that I run it from 1980 so that it felt more recent and relevant to his investors. It is true that a 40-year or more investment period is a more realistic time frame for an individual investor, especially given today’s long lifespans, when even an investor with $10,000 to invest at age 40 could live until age 90 or older. Additionally, these long time frames are also relevant for any investor looking to leave a legacy for family members.
This relatively shorter time frame produced the same story. In the prior analysis dated to 1957, investors earned 1.8x more by being fully invested vs. sitting out the first 100 days of a new administration or a second term. Since 1980, investors would have earned 1.9x ($324,000 vs. $169,000) by staying fully invested.7
Figure 3: The benefits of staying fully invested over the last four decades
Growth of a $10,000 investment in the S&P 500 staying fully invested since 1980 vs. missing the first 100 days of each president’s first or second term.
It’s a great story and more fodder for my presentation detailing why elections don’t matter nearly as much for markets as investors suspect that they do. I thanked the advisor for the idea, and he joked that he wants credit for the concept. Respecting compliance regulations for his firm and mine, I’ll refrain from calling out his name. Hopefully, this blog representing his contribution will suffice.
For more on the importance on maintaining a long-term perspective during an election cycle, view “The truth about presidential elections and the stock market.”
1 Sources: Haver, Invesco, as of 6/30/20
2 Sources: Haver, Invesco, as of 6/30/20
3 Sources: Bloomberg L.P., Standard & Poor’s, Invesco, as of 8/31/20
4 Sources: Bloomberg L.P., Standard & Poor’s, Invesco, as of 8/31/20
5 Sources: Bloomberg L.P., Standard & Poor’s
6 Sources: Bloomberg L.P., Standard & Poor’s
7 Sources: Bloomberg L.P., Standard & Poor’s, Invesco, as of 8/31/20
Important Information:
Photo credit: Credit: carterdayne / Getty
Index Definitions:
The S&P 500 Index is a stock market index that measures the stock performance of 500 large companies listed on stock exchanges in the United States.
The Dow Jones Industrial Average is a price-weighted index that tracks 30 large, publicly owned companies trading on the New York Stock Exchange and the NASDAQ.
The opinions referenced above are those of the authors as of September 15, 2020. These comments should not be construed as recommendations, but as an illustration of broader themes. Forward-looking statements are not guarantees of future results. They involve risks, uncertainties and assumptions; there can be no assurance that actual results will not differ materially from expectations.
This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial advisor/financial consultant before making any investment decisions.
All data provided by Invesco unless otherwise noted.
Levitt, Brian. “It May Not Pay to Avoid the Market in the Early Days of a New Administration.” Invesco Blog, 16 Sept. 2020, www.blog.invesco.us.com/it-may-not-pay-to-avoid-the-market-in-the-early-days-of-a-new-administration/?utm_campaign=bdnewsletter.