It’s less than six weeks to the US presidential elections. Capital Group has made a few rules of thumb for investors to give some guidance.
Since 1936, the S&P 500 has correctly predicted the results 20 times out of 23. If the S&P 500 index rises in the three months preceding election day, the incumbent usually wins. If the markets fall during that period, the victory usually goes to the challenger. But this statistic should not be an excuse for timing the markets; the phenomenon is usually short-lived and gives way to long-term upward trends.
History shows that equities always do well, regardless of who controls the White House and Congress. There have been 42 years since 1933 when one party controlled both the White House and both chambers of Congress. During such periods, US stocks achieved an average double-digit return. This is almost identical to the average return in years when Congress was divided between the two parties. The worst scenario for investors is when Congress is controlled by the party other than the President. Even in this scenario, however, a solid average return of 7.4% was recorded.
The winner doesn’t matter
So it does not matter which party wins the election. In the last 85 years, there have been seven Democratic and seven Republican presidents and the stock markets have always risen. For investors, staying invested is more important than the outcome of the elections.
Nevertheless, the presidential elections have a clear influence on investor behaviour. US investors are much more likely to opt for money market funds - one of the least risky investment vehicles - during election years. Equity funds, on the other hand, have the highest net inflows in the year immediately following an election. But market timing is seldom a winning investment strategy and can reduce a portfolio’s return.
What is the best way to invest during an election year then? Capital Group looked at three hypothetical investors, each with a different investment approach, and calculated the result of their portfolios over the last 22 election cycles, assuming a holding period of four years. The investor who remained on the sidelines had the worst outcome 16 times out of 22, and registered the best outcome only three times. Investors who were fully invested during the election years, or who made monthly contributions, were the most likely to come out on top.