Election 2020: What happens if we don’t know the results for a while?

Investors continue to ask me if they should get out of the market to “sit out this election.” I’ve attempted to push back against this impulse by using long-term historical perspectives to remind investors that, as always, it’s time in the market that matters rather than timing the market. In my last blog I represented that investors’ long-term returns would have been meaningfully diminished had they sat out the first 100 days following each of the inaugurations over the past 60-plus years.

The response to that blog had many inquiring, not about the first 100 days of a term, but rather about the performance of markets in the weeks leading up to the election. Here are the results. The average and the median returns are positive, modestly better if you exclude the 2008 global financial crisis.1

Figure 1: Historical market performance from mid-September to election day in presidential election years

S&P 500 Index total returns (1960-2016)

Source: Bloomberg. For illustrative purposes only. It is it not possible to invest directly in an index, and these hypothetical returns are not meant to imply the expected returns for an individual investor. Past performance is no guarantee of future results.

Not much to see there. There doesn’t appear to be a substantial spike in volatility around election days either. In fact, market volatility was below average on most of the election days dating back to 1960.2

Figure 2: Market volatility in the fall before election day

Average volatility (3-month moving average) of the Dow Jones Industrial Index

Source: Bloomberg. For illustrative purposes only. It is it not possible to invest directly in an index, and these hypothetical returns are not meant to imply the expected returns for an individual investor. Past performance is no guarantee of future results.

But isn’t this time different because we may not know the results of the election for a while? Perhaps, and admittedly market volatility and drawdowns tend to be the result of policy uncertainty. It wouldn’t, however, be the first times in our lives that we didn’t know the election results on the first Tuesday night of November. In the election of 2000 between George W. Bush and Al Gore, a victor wasn’t declared until December 13, 2000. The S&P 500 Index was down 4.8% between the election on November 7, 2000, and the Supreme Court decision over a month later that settled the recount dispute in Florida’s presidential election.3 By way of reference, the S&P 500 Index was down by a similar amount this year in two days at the end of the first week of September.4

Figure 3: The US stock market’s performance after the 2000 presidential election S&P 500 Index total returns, January 2000-December 2002

S&P 500 Index total returns, January 2000-December 2002

Source: Bloomberg. For illustrative purposes only. It is it not possible to invest directly in an index, and these hypothetical returns are not meant to imply the expected returns for an individual investor. Past performance is no guarantee of future results.

Let’s also remember that the sell-off in 2000 was during the early days of a US recession5 at a time when equities were trading excessively expensive compared with bonds,6 and the US Federal Reserve had raised interest rates by 175 basis points over the prior 15 months.7 Currently, the US appears to be recovering from a recession, stocks are trading as cheap to bonds as they have been in years,8 the Fed has cut interest rates to zero9 (real yields are negative)10, and it is signaling that it intends to provide supportive policy accommodations well into the future. 

As a result, I would view any potential drawdowns resulting from the uncertainty of the election as a buying opportunity.

Read Brian Levitt’s previous Election 2020 blog: It may not pay to avoid the market in the early days of a new administration.

For additional information on the importance on maintaining a long-term perspective during an election cycle, view “The truth about presidential elections and the stock market.”

1  Source: Bloomberg. Returns are of the S&P 500 Index from September 15th of each election year through the day of the election. September 15 was chosen to illustrate market returns from roughly six to seven weeks before the elections through to the election date.

2  Source: Bloomberg, as represented by the volatility of the Dow Jones Industrial Average, as of 8/31/2020

3 Source: Bloomberg, Invesco

4  Source: Bloomberg, as of 9/10/2020. Returns are of the S&P 500 Index on Thursday, September 3 and Friday, September 4 of 2020.

5  Source: National Bureau of Economic Research

6  Source: Bloomberg.  The analysis is a comparison between the earnings yield of the S&P 500 Index and the yield of the 10-year US Treasury.

7  Source: US Federal Reserve

8  Source: Bloomberg. The analysis is a comparison between the earnings yield of the S&P 500 Index and the yield of the 10-year US Treasury.

9  Source: US Federal Reserve

10  Source: Bloomberg.  Based on the difference between the 10-year US Treasury rate and the headline US Consumer Price Index, as of 8/31/20

Important Information

Image Credit: Lucky Photographer / Getty

Index Definitions:

The S&P 500 Index is a stock market index that measures the stock performance of 500 large companies listed on stock exchanges in the United States.

The Dow Jones Industrial Average is a price-weighted index that tracks 30 large, publicly owned companies trading on the New York Stock Exchange and the NASDAQ.

The opinions referenced above are those of the author as of September 23, 2020. These comments should not be construed as recommendations, but as an illustration of broader themes. Forward-looking statements are not guarantees of future results. They involve risks, uncertainties and assumptions; there can be no assurance that actual results will not differ materially from expectations.

This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial advisor/financial consultant before making any investment decisions.

All data provided by Invesco unless otherwise noted.

Credit: Invesco

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