Financial Myth #3: Election Years Influence Stock Market Returns
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Welcome to the Stay Wealthy Podcast. I'm your host, Taylor Schulte. And today we are busting myth number three, election years influence stock market returns. Now, we all know that 2020 is an election year, and it's not uncommon for investors to believe that because it's an election year, the stock market must be in for a wild return.

ride. Even more, some investors suggest that if the party they favor wins the election, it's going to be good for the markets. But if the other party wins, it's going to tank them. Now, I'm not going to pretend to be able to predict the future here, but looking back at 90 plus years of data can certainly be helpful in making informed decisions with our money and our investments.

I'll be sharing a lot of numbers and data points with you today. Lucky for you, my wife has been blasting Christmas music all week. I'm in the Christmas spirit and feeling extra generous. So I put together this 14-page PDF with some nice charts and graphs and numbers documenting just about everything I reference in this episode. To download that PDF, there's no strings attached. Just head over to youstaywealthy.com forward slash 59.

Since 1928, we've had 23 election years. The first was Hoover versus Smith. And the most recent, of course, was Trump versus Clinton. I went through a bunch of data over this 90 year period, and I pulled a few interesting things that I wanted to share with you today.

Out of these 23 election years, only four of them experienced a negative return for the US stock market if we're measuring it by the S&P 500. In other words, the stock market has only had a negative return during an election year 17% of the time, 83% of the time it's been positive. The average return of the S&P 500 during those 23 election years has been a positive 11.3%.

The average return for the subsequent year, meaning that the year after the election, has been a little bit worse, but still a positive 9.9%.

The worst performing election year was in 2008, Obama versus McCain. And we were, of course, in the middle of the Great Recession. We're all very familiar with how that ended. The S&P 500 ended the year down 37%. On the flip side, the best performing election year was the very first, which I found interesting, or at least for this set of data, the very first in 1928, Hoover versus Smith, where the S&P 500 ended the year up 37%.

43.6%. Now, you might be thinking to yourself, well, an election year or even the subsequent year is just one year. So what about the four years during their presidency? Don't worry, I have you covered. So out of the 23 presidential terms that we're looking at since 1929,

only four of them ended in the red. Those four are Hoover, Roosevelt, and then both of George W. Bush's terms. So during President Hoover's term from 1929 to 1932, the S&P 500 returned a negative 22.66%. During Roosevelt's second term from 1937 to 1940, the S&P 500 returned a negative 6.46%.

And then George W. Bush's first term from 2001 to 2004, the S&P 500 was essentially flat. But for me in technical here, it was down about half of a percent, but still technically negative. And then George W. Bush's second term from 2005 to 2008, the S&P 500 was down 5.21%.

So, Democrats must be better for the stock market.

Personally, I don't support that conclusion for two reasons. One, every single president saw severe corrections in bear markets under their watch. The average stock market drawdown, drawdown being an intra-year drop in the markets, the average stock market drawdown during all four-year presidential terms was

has been 30%. So just because a presidential term ended with positive returns doesn't mean it was a smooth, easy ride for everyone. For some presidents, the timing of when they took and left office worked really great in their favor. And then for others, not so much.

I believe that there's this element of luck at play here, especially since policy decisions affect the economy with a lag. We may not see the effect of something, let's say, Obama put into place for years. The same could be said for Bush or even Trump today. It takes time for these things to play out. And sometimes the wrong party or person gets the blame when we're digging through this historical data.

Number two, the president doesn't really have a lot of control over monetary policy. In general, the Federal Reserve has more to do with the success of our economy and the stock market than the president.

All that being said, if I'm being completely objective here, and we really do want to turn this into a competition, total returns under Democrats have been slightly higher than Republicans. If we go way back to 1853, which is as far back as I could go, total returns under Democrats since then have been 1,340%. And total returns under Republicans have been

1,270%. So pretty close, but if we want to get really technical here and make this a competition, Democrats slightly edged out over Republicans since 1853.

So here's where I stand with all of this. I'm an evidence-based investor, meaning I only make investments and investment decisions if there's long-term academic data to support it. And there's no long-term academic data that suggests we should change our financial plan or how we're investing our money just because it's an election year or a certain party is in office or a certain party is projected to take office.

One counter argument I often hear to this is, Taylor, this time is different. The things we're up against today are different than they were 20 years or 40 years ago.

To which I kind of say or say to myself, it always feels different. There's always something new and scary going on that makes people feel like this time is different. I just shared a lot of long-term historical data going way back and all of it ended up with positive results over the long-term if you just stayed the course and think about

all the major historical events that occurred during those time periods and presidential terms that, you know, for sure made people feel really uneasy and scared. You know, using the data we looked at today, think about the Great Depression, World War II. We had the Korean War in the early 50s, the Vietnam War in the late 60s, massive inflation and sky-high interest rates in the 80s, which we talked about two episodes ago.

The tech bust and boom in the 90s. Of course, we had the Great Recession in 08, 09, which was the second worst recession in history. And then you guys might remember in 2013, the US government shutdown. There are always these major events that are going to make people feel uncertain. And although things might feel different today, and they are different today, but

I just don't see any evidence to support making a meaningful change to a long-term financial plan. And I've said this before, and I just want to mention it again because many of our listeners are at a later stage in life.

If you are nearing retirement or you're in retirement, you too have a long-term financial plan. Don't kid yourself that because you're in retirement, you no longer have a long-term financial plan. You might spend more time in retirement than as a working professional, and you need your money and investments to be working for you over the next

30 plus years to take advantage of compounding returns to combat inflation and generate a healthy income stream in retirement. You can't afford to be jumping in and out of the market just because you have a hunch about a political event or a presidential candidate. On average, you're going to be wrong and your financial plan is going to suffer.

For all the links and resources mentioned in today's episode, including that 14-page PDF I talked about in the beginning, head over to youstaywealthy.com forward slash 59. I'll see you guys here back in two weeks.

Hey, it's me again. I just wanted to say thank you one more time for listening and remind you to please, please, please leave a quick review. If you're on an iPhone, leave a quick review on iTunes. If you're enjoying the show, I'm getting great feedback from listeners just like you. And I really want to keep the momentum going. So if you have a chance on your iPhone, leave a quick review on the Apple podcast app. And thank you so much in advance for all of your help and support.

This podcast is for informational and entertainment purposes only and should not be relied upon as a basis for investment decisions. This podcast is not engaged in rendering legal, financial, or other professional services. ♪