Presidential Elections’ Effects on the Markets

Quick Market Note:  The markets have been volatile this week.  These are short term, temporary fluctuations that have been happening on and off for a hundred years.  And it always works out in the end.

Moving on….

I get a ton of questions from readers. Luckily, I have lots of good answers! Today, I am going to share a few of the most common questions and my answers.

Question #1: Do presidential elections affect the stock market?

While the election is still a little over a year away, I still sit down with skittish and concerned investors at least once a week. So what is it? Do presidential elections make the markets go up? Down? Is it better if a Republican is elected, as opposed to a Democratic administration? Do markets generally go up or down before an election? What about after the election?

There are actually several academic studies on the subject. Going all the way back to George Washington, the trend is remarkably clear. In fact, presidential elections have had the same effect on the markets for hundreds of years.

So, in the end, what is the answer? What kind of effect does an election year have on your investments?

None. Literally. 

There is no correlation between presidential elections and the stock market. There might be some elevated volatility, but from a long-term perspective, no one can find any positive or negative connection between presidential elections and the stock market. Strong capitalist economic systems have shown incredible resilience under all presidential administrations, be it Martin Van Buren or Millard Fillmore.

By the way, during the presidency of Chester A. Arthur in 1886, the Dow Jones Industrial Average was at 30 points. Yesterday the Dow Jones closed at over 25,000.

Question #2: How do you know that the stock market will continue to average around 10% per year?

Some people accuse me of being an optimist, but I prefer to look upon myself as a realist. For 240 years people have been betting against America and for 240 years they have been wrong.

But the American economy has reached its limit. The last century may have been great, but most of the innovation has already occurred…. 

It’s like when your dad told you that music was doomed after Elvis Presley, or how you said the same thing to your kids except your reference was The Beatles. We have been doomsdaying the economy for centuries. And we’ve been wrong every time.

Here’s some perspective. There have been more improvement to the human condition in the past century than all the previous centuries combined since man first appeared on the Earth.

  • A gallon of milk costs 90% less today than it did in 1900 (accounting for inflation).
  • In fact, 50% of American incomes went toward food in 1900, compared with 10% now.
  • In 1900, the life expectancy in the U.S. was 47. Now it is 79.
  • Penicillin, by itself, has saved more lives in the past 50 years than all of medical treatment and medicines during the rest of human history.
  • In 1900, ten Ph.D.’s in physics were awarded each year. Now that number is 6,000 per year.

I could go on.

What is my point? We are living in the most affluent and free society in all of human history. Of course we need to be vigilant to keep this country strong, but can you imagine what the next 100 years could bring?

Probably not. I know I can’t. Because it is going to bring advancements we can’t even imagine now.

Maybe curing cancer will be as simple as taking an over-the-counter pill. Maybe solar energy technology will advance to the point where we have unlimited, free, clean, renewable energy. Personally, I’m excited to see where human innovation takes us next!

What does that mean for the stock market? Innovation fuels a healthy economy and a healthy stock market. It’s been that way for over a hundred years, and there’s no indication it’s going to change anytime soon.

Question #3: Once I retire, am I too old to invest?

The life expectancy of a healthy 65 year-old is around 90 years. Without utilizing growth investments, such as stocks, you are missing out on a powerful tool. I’m not promoting that you put all of your money in the stock market, but a diversified portfolio of stocks and bonds is usually appropriate throughout your entire lifetime. Whether you are 19 or 91.

Question #4: Do I need to have my house paid off before I retire?

While it might feel nice to be debt-free, it is not a prerequisite for retiring. Thirty-six percent of Boomers still have a mortgage once retired. As long as your retirement budget can handle the payment, many people retire with a mortgage.

I often hear, “Dave, I’m going to do everything I can I pay off my house by the time I retire.” While I love the enthusiasm, this attitude usually means that 401k contributions stop and emergency cash funds might be reduced to a couple thousand dollars. Make sure your cash reserves and retirement accounts are being funded, and then you can put some extra money toward the house.

Question #5: Can I lose all my money in the stock market?

I guess. Anything is possible. World War III? Planet is hit by a meteor? I’m only half-joking. While it’s true you could lose all of your money by investing it all in a single stock or a single bond, a diversified portfolio of stocks and bonds has never gone to zero. In fact, in the past fifty years, the WORST year for an investor with a 50/50 stock/bond portfolio was 1974. You would have lost about 12% overall for the year. By the way, the same portfolio would have been up 20% the following year.

Gotta question for me? Email me at david@kennonfinancial.com.

Be Blessed,

Dave

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