Presidential elections matter, but not so much when it comes to your investments

While presidential elections can of course be hugely consequential in terms of the direction of public policy, they should not dictate your investment decisions.

Numerous variables influence the political climate in a presidential election year, making it difficult to base market strategy on a single factor. Vanguard research dating to 1860 finds no statistical relationship between the performance of a 60% equity/40% bond portfolio in presidential election and non-election years, as shown in the first chart that follows.

Markets efficiently price in current events. It’s difficult to predict volatility or blame it on one specific cause because there are dozens of potential factors. Market reactions reflect changes in economic expectations and efficiently “price in” current events, including elections.

Comparing presidential election years versus non-presidential election years: 60% stock/40% bond portfolio returns show no statistical difference

Sources: Vanguard calculations, based on data from Global Financial Data (GFD) as of December 31, 2022. The 60% GFD US-100 Index and 40% GFD US Bond Index is calculated by GFD. 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 chain-linked to the previous year’s index. The index is capitalization-weighted, and both price and return indexes 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 monthly.

Notes: 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.

Given the horse-race nature of political campaigns, you may think that in the months closest to a presidential election, there will be a noticeable uptick in volatility. In actuality, the opposite has been true.

As shown in the chart below, for presidential elections from 1984 to 2020, the Standard & Poor’s 500 Index’s annualized volatility was 16.5% in the 100 days before a presidential election and 15.9% for the 100 days after an election, both of which were lower than the 17.9% annualized volatility for the full time period.

Volatility and the vote in presidential elections from 1984 to 2020: Markets tend to ignore the results

Sources: Vanguard calculations as of December 31, 2022, using data from Refinitiv.

Notes: Intraday volatility is calculated as the daily range of trading prices ([high-low]/opening price) for the Standard & Poor’s 500 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.

The bottom line: Presidential elections are events that generate lots of headlines, but they should not sway you to change the financial plan you and your advisor create. It’s understandable to have concerns about an election, but as far as your portfolio and the markets are concerned, history suggests they are a nonissue.

Part of successful investing is understanding what you can control and letting your emotions take a backseat to the financial plan you and your advisor put in place. By maintaining perspective, discipline, and a long-term outlook, you can sustain progress toward your financial goals.

Notes

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.