staying the course – even through election cycles

We’ve been encouraging our donors to continue to stay the course through our current market volatility and looming recession. One may also wonder what they should do during times of political leadership changes, as we’re currently facing now with the mid-term election just hours away. I received the below thoughts and data from our friends with Hardy Reed, LLC, an independent investment advisory firm based out of MS, and thought them valuable enough to share.

midterm elections – what do they mean for markets?

It’s Election Day in the US once again. For those who need a brief civics refresher, every two years the full US House of Representatives and one-third of the Senate are up for reelection. While the outcomes of the elections are uncertain, one thing we can count on is that plenty of opinions and prognostications will be floated in the days to come. In financial circles, this will almost assuredly include any potential for perceived impact on markets. But should long-term investors focus on midterm elections?

markets work

We would caution investors against making short-term changes to a long-term plan to profit or avoid losses from changes in the political winds. For context, it is helpful to think of markets as a powerful information processing machine. The combined impact of millions of investors placing billions of dollars worth of trades each day results in market prices that incorporate the aggregate expectations of those investors. This makes outguessing market prices consistently very difficult. While surprises can and do happen in elections, the surprises don’t always lead to clear-cut outcomes for investors.

The 2016 presidential election serves as a recent example of this. There were a variety of opinions about how the election would impact markets, but many articles at the time posited that stocks would fall if Trump were elected. The day following President Trump’s win, however, the S&P 500 Index closed 1.1% higher. So even if an investor would have correctly predicted the election outcome (which was not apparent in pre-election polling), there is no guarantee that they would have predicted the correct directional move, especially given the narrative at the time.

But what about congressional elections? For the upcoming midterms, market strategists and news outlets are still likely to offer opinions on who will win and what impact it will have on the markets. However, data for the stock market going back to 1926 shows that returns in months when midterm elections took place did not tend to be that different from returns in any other month.

Exhibit 1 shows the frequency of monthly returns (expressed in 1% increments) for the S&P 500 Index from January 1926–June 2022. Each horizontal dash represents one month, and each vertical bar shows the cumulative number of months for which returns were within a given 1% range (e.g., the tallest bar shows all months where returns were between 1% and 2%). The blue and red horizontal lines represent months during which a midterm election was held, with red meaning Republicans won or maintained majorities in both chambers of Congress, and blue representing the same for Democrats. Striped boxes indicate mixed control, where one party controls the House of Representatives, and the other controls the Senate, while gray boxes represent non-election months. This graphic illustrates that election month returns were well within the typical range of returns, regardless of which party won the election. Results similarly appeared random when looking at all Congressional elections (midterm and presidential) and for annual returns (both the year of the election and the year after).

in it for the long haul

While it can be easy to get distracted by month-to-month or even one-year returns, what really matters for long-term investors is how their wealth grows over longer periods of time. Exhibit 2 shows the hypothetical growth of wealth for an investor who put $1 in the S&P 500 Index in January 1926. Again, the chart lays out party control of Congress over time. And again, both parties have periods of significant growth and significant declines during their time of majority rule. However, there does not appear to be a pattern of stronger returns when any specific party is in control of Congress, or when there is mixed control for that matter. Markets have historically continued to provide returns over the long run irrespective of (and perhaps for those who are tired of hearing political ads, even in spite of) which party is in power at any given time.

This information is intended for educational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products, or services. The material has been gathered from sources believed to be reliable, however Hardy Reed cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. Opinions expressed herein are based on economic or market conditions at the time this material was written, however economies and markets fluctuate. Actual economic or market events may turn out differently than anticipated. Any reference to an index is included for illustrative purposes only, as an index is not a security in which an investment can be made. The historical performance results of the comparative benchmarks do not reflect the deduction of transaction and custodial charges, or the deduction of an investment management fee, the incurrence of which would decrease indicated historical performance. Past performance is not a guarantee of future results. Advisory services are only offered to clients or prospective clients where Hardy Reed and its representatives are properly licensed or exempt from licensure. No advice may be rendered by Hardy Reed unless a client service agreement is in place. Past performance is not a guarantee of future results. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio.

Summary

Like us at UMF, they believe that equity markets can help investors grow their assets, and also like us, investing is a long-term endeavor. After digesting the above data, I agree that history has shown no solid evidence that making investment decisions based on the outcome of elections would result in additional returns to investors.  We also agree with Hardy Reed that there is a strong case for investors to rely on patience and portfolio structure, rather than trying to outguess the market, to pursue investment returns. Another way of saying, stay the course.

This article was submitted by Ivanna Cole, CFO of UMF of North Carolina. If you would like more information regarding UMF or this articles, please contact Ivanna at [email protected].