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Welcome to the Stay Wealthy Podcast. I'm your host, Taylor Schulte, and today I'm discussing investing during an election year, specifically over the last 100 years. How have markets behaved during election years? What have been the best and worst returns for the market during these years? Even more, how has the market performed during every four-year presidential term? And what lessons can we draw from the data?
If you're interested in the charts and data that I'm referencing today, be sure that you're on the Stay Wealthy newsletter list. I put everything together in a nice 12-page PDF, and I'll be sharing it with newsletter readers this week and next.
to join the newsletter, just head to you stay wealthy.com forward slash email. That's you stay wealthy.com forward slash email. I'll also provide a link in your podcast app, as well as the show notes for today, which can be found by going to you stay wealthy.com forward slash two one one.
It's not uncommon for investors to believe that because it's an election year, the stock market must be in for a wild 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. Look, I'm not going to pretend to be able to predict the future today, but looking back at almost 100 years of data can certainly be helpful in making informed decisions with our money and our investments.
or at the very least help to reinforce our philosophy and approach to investing let's dive into the data since 1928 as far back as this data set goes we've had 24 election years the first election year in 1928 was hoover vs smith and the most recent of course was trump biden in 2020
Believe it or not, out of these 24 election years, going all the way back to 1928, the U.S. stock market only experienced a negative return during four of them. Said another way, going back to 1928, the U.S. stock market has produced
positive returns during an election year, 83% of the time, 83% of the time. And we're not just talking about slightly positive returns here. The average return for the S&P 500 during every election year during this time period was 11.5%.
Okay, but maybe the subsequent year, i.e. the year after an election year, is when the dust finally settles and things get ugly. And yes, while 40% of years subsequent to an election year have produced negative returns, the U.S. stock market has still produced an average annual return of 10.7% during the 24 years following an election year.
You definitely had to weather a few more storms, but investors on average still came out with slightly higher returns in the subsequent years than the long-term historical average for the U.S. stock market. In case you're wondering, the worst performing election year was Obama-McCain in 2008. And that shouldn't be totally surprising given that we were in the middle of the great financial crisis at the time, resulting in a negative 37% return for U.S. stocks that year.
The best performing election year, funny enough, was the first election in the data set that I'm using. And that was Hoover versus Smith in 1928 when the S&P 500 produced a positive return of 44%, which ironically was right as the worst economic downturn in history. The Great Depression was about to unfold.
So we've taken a few lumps over the last 24 election years, but historically, we've witnessed positive returns in the U.S. stock market 83% of the time. And the average annual return during those 24 election years has been slightly higher than the long-term historical average for the U.S. stock market. Pretty encouraging, right?
But an election year or even the subsequent year is just one 12-month time period. Anything can happen in 12 months. So what about market returns for the four-year terms served by presidents? Well, just like election years, since 1928, there have been 24 four-year presidential terms. Some of those, of course, repeat terms by the incumbent.
And oddly enough, just like election years, the market only ended in negative territory in four of those 24 terms. In other words, only 17% of four-year presidential terms have resulted in negative total returns for U.S. stocks. Those four are Hoover from 1929 to 1932, Roosevelt from 1937 to 1940, and then both of George W. Bush's terms in the early 2000s.
When you look at the charts that I'm sharing with newsletter readers this week and next, Hoover's term from 1929 to 1932 is the clear outlier, with the U.S. stock market returning a negative 64% return for the entire four-year time period.
To put those losses into perspective, if you invested $100,000 at the beginning of Hoover's term, reinvested all the dividends and stayed the course, you would have been staring at $36,000 in your account by the end of his four years. And you thought the 08-09 crisis was bad. This was just an absolutely brutal time period for the markets and economy.
Right behind Hoover, Franklin D. Roosevelt's second term from 1937 to 1940 was the second worst performance for a presidential term, with the U.S. stock market producing a total negative return of 23%.
Finally, George W. Bush's first term from 2001 to 2004 was essentially a flat market with the U.S. stock market producing a negative total return of 2%. His second term, on the other hand, extended into the lost decade and bled into the 2008 financial crisis, producing a total negative return of about 19% during the four-year term that began in 2005 and ended in 2008.
So from the beginning of Bush's first term to the end of his second term, eight years, the U.S. stock market had a total negative return of 21%. However, similar to the episode that I published on investing during the last decade, it would be incredibly rare for a smart, prudent, diversified investor to have 100% of their nest egg invested in U.S. stocks.
If an investor just sprinkled in some basic diversification, the return numbers during this time period almost get flipped on their head. For example, a three fund portfolio comprised of 40% U.S. stocks, 20% international stocks and 40% intermediate term treasury bonds is
had a total positive return of 15% through both of Bush's terms from 01 to 08. It's just truly amazing what a little diversification can do to portfolios' long-term returns, especially when we go through difficult, strange time periods like we did in the early 2000s.
OK, so outside of those four presidential terms, all of the other four year periods ended in positive territory for U.S. stocks, with Roosevelt's first term from 1933 to 1936 producing the highest total return of 200 percent.
The average annual return for all presidential terms since 1929 is 10.28%, which of course represents the long-term historical average for the stock market for the last 95 years. Now, while most four-year presidential terms ended in positive territory, one interesting and important fact to hold on to is that every single president throughout history experienced significant drawdowns under their watch,
Republican, Democrat, and everyone in between oversaw a double-digit drawdown in the U.S. stock market. In fact, the average stock market drawdown, i.e. an intra-year drop in the market, the average stock market drawdown during all four-year presidential terms since 1929 has been a drop of 30%.
So just because a presidential term ended with healthy, positive returns doesn't mean it was a smooth, easy ride for U.S. stock investors. Similarly, just because a presidential term ended with negative returns doesn't necessarily mean it was a four-year disaster for the markets and investors.
For some presidents, the timing of when they took and left office worked out very well in their favor. And for others, not so much. There's an element of luck at play here that's hard to ignore, especially since policy decisions often affect the economy with a lag.
As I've discussed here on the show before, the stock market is not the economy, and we may not see or feel the effect of something positive or negative that the Biden administration, for example, puts into place for years to come. It takes time for these major changes or even blunders to work their way through the economy and the markets. And sometimes, or maybe most of the time, the wrong party or person gets the blame for negative results when we're digging through historical data.
Also, let's not forget the Fed and their role in the economy, monetary policy, and financial markets. While there may be some influence by the White House, the Federal Reserve operates independently and, as we know, can positively or negatively impact the economy and the financial markets during the current or even future president's term.
If we're looking for any reliable trend in the data outside of long-term investors benefiting from ignoring the short-term noise, it's that the market likes when there's no single political party that has too much control or sway. Hence why we see stronger historical stock market performance when Congress is split.
As Ryan Detrick put it, markets tend to like checks and balances. Look, it's not fun or exciting, but the truth is we truly don't know what the market will deliver this year, the next four years, or even the next decade. Even if we don't know what the market will deliver this year, the next four years, or
Even with the election results in our hands, predicting the future is just about impossible. When Trump was elected in 2016, the New York Times said, quote, Under any circumstances, putting an irresponsible, ignorant man who takes his advice from all the wrong people in charge of the nation with the world's most important economy would be very bad news. We are looking at a global recession with no end in sight. Mark.
Mark Cuban at the same time was also quoted saying the market would crash if Trump won the White House. Despite these headlines that you may or may not have agreed with at the time, the U.S. stock market was up 81% during Trump's four-year term, and there were more than 130 new all-time highs on the S&P 500.
Similarly, in 2009, the Wall Street Journal published a story saying that Obama's radicalism is killing the Dow Jones. Instead, a 10-year bull market was born, and similar to Trump, the stock market hit over 130 new all-time highs during his tenure.
I'm not suggesting that either president and these examples were perfect or that they didn't do something that had or will have a negative impact on the economy and or markets. My point is simply that it's just about impossible to predict what the next four years will produce, let alone what happens this year as the election unfolds.
What we can predict with quite a bit of certainty is that it's likely not going to be a smooth ride. It never is. Markets are volatile and unpredictable, and every presidential term throughout history has included sizable drawdowns in the market.
Remember, on average, the stock market has a 10% drawdown once every year. Republican, Democrat, good president, bad president, a 10% drawdown about every 12 months should be expected and built into a long-term plan and should not come as a surprise to equity investors.
If you're thinking of making significant changes to your portfolio ahead of this year's election or any future election, consider answering these great questions posed by investment writer Ben Carlson.
If I sell out of the market because of the president, does that mean I have to stay out of the market until a new president takes over? If I sell out of the market because of the president and the stock market moves higher, will I buy back in or continue to sit on the sidelines? If I sell out of the market because of the president and the stock market crashes, will I buy in at lower prices or continue to sit out based on my political beliefs?
If I sell out of the market because of the president and things don't turn out as bad as I originally thought, how will I know I was wrong? Look, it's hard enough to manage the emotions of investing our hard-earned money. Letting politics influence your money decisions will make that task even more difficult and likely more stressful.
When I bring up this topic, when politics or election years enter the investing discussion, a common response or argument against staying the course and ignoring the headlines is something like, yeah, you know, Taylor, I get it. The historical data is compelling and optimistic.
But this time is different. The things we're up against today, the candidates we have to choose from, the threats our country is dealing with, the unsolved challenges that desperately need a proper solution are wildly different. And the consequences are much more extreme than they were 25 years ago or even 50 plus years ago.
To which I say, well, it's always different, or at least it always feels different. And in the moment, it typically feels scarier and more extreme than prior moments in history. History has a strange way of repeating itself, but the reoccurring themes and events, they show up in new and different ways.
We just combed through almost 100 years of market returns. And as long as investors stayed the course and maintained a diversified portfolio for time periods as short as eight years, they experienced positive results. But think about all the major historical events and storms that investors had to weather during the last 100 years to achieve a positive investment outcome.
The events that made them feel like this time is different and more extreme. Not just the Great Depression and World War II, but we also had the Korean War in the early 50s, the Vietnam War in the late 60s, massive inflation and sky-high interest rates in the 70s and 80s, the tech bust and boom in the 90s, 9-11, the second worst recession in history in 08-09, and of course the global pandemic.
And those are just the headlines. There were hundreds, if not thousands of other events that caused worry and stress and anxiety about the direction of the economy and the markets and the hard earned money being invested to fund financial and retirement goals.
There have been and always will be major events that will attempt to influence people to make irrational changes to their plan and veer off course. And although things might be or at least feel different today, I just don't see any evidence to support making a meaningful change to a long-term financial plan in response to these feelings or in response to it being an election year or in response to who we think might take office next.
And as always, yes, even those who are in retirement have a long-term financial plan that they need to commit to and protect. You might spend more time in retirement than as a working professional, and you need your money and investments to be working for you properly over the next 20, 30, 40 plus years to combat inflation and generate a reliable retirement paycheck.
Most people can't afford to be jumping in and out of the market just because they have a hunch about a political event or what a presidential candidate might do to the financial markets. If you play that game, on average, you're going to be wrong and your financial plan is going to suffer as a result.
Once again, I'll be sending the 12-page PDF that I put together for Stay Wealthy newsletter readers. I'll be sending it this week and next. The PDF includes updated data and charts on investing during an election year and includes data sets on international stocks, bonds, as well as the U.S. markets.
To join the Stay Wealthy newsletter, just go to youstaywealthy.com forward slash email. That's youstaywealthy.com forward slash email. And to grab the show notes for today's episode, just head over to youstaywealthy.com forward slash 211.
Thank you as always for listening, and I'll see you back here next week.
