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How to invest in an election year

January 10, 2024

Presidential elections can be divisive and unsettling. At times, the fate of the world seems to hang in the balance. But when it comes to investing, do elections really matter all that much? 

U.S. voters will have their say in November 2024, but by maintaining a long-term focus, investors can position themselves for a brighter future regardless of the outcome at the voting booth. In fact, overreacting to short-term volatility during election cycles can be detrimental to investment returns.

In this commentary, I address questions about investing in an election year, drawing insights from our analysis of over 90 years of investment data across 23 election cycles.

U.S. stocks have trended up regardless of whether a Republican or Democrat won the White House. A $1,000 investment in the S&P 500 Index when FDR became president in 1933 would have been worth over $19 million in 2023. During that time, there have been seven Republican and eight Democratic presidents.

Primary season tends to be volatile, but markets have bounced back strongly afterward. Stocks have returned 11.3% in the 12 months following primaries, compared to 5.8% in similar periods of non-election years.

It’s time, not timing, that matters most. The S&P 500 Index had negative returns in only two of the last 20 election years (2000, 2008), and both declines were largely attributed to asset price bubbles rather than politics. Both years were severe downturns within secular bear markets.

If you’re nervous about the markets heading into 2024, you’re not alone. Presidential candidates often draw attention to the country’s problems, and campaigns tend to amplify negative messages. So, it’s no wonder that investors may start feeling a little pessimistic too. This can become a problem if they allow their mood to affect their money.

History shows that investors have poured into money market funds — traditionally one of the lowest-risk investment vehicles — with greater frequency ahead of elections. By contrast, equity funds have seen the highest net inflows in the year immediately after an election. This trend holds true even for international funds.

This suggests that investors want to minimize risk during election years and wait for uncertainty to subside before revisiting riskier assets like stocks. But market timing is rarely a winning long-term investment strategy and can pose a major problem for portfolio returns. Bottom line: Investors often get nervous and move to cash in election years, but that’s rarely a winning strategy.

"This material is provided for general information and is subject to change without notice.  Every effort has been made to compile this material from reliable sources however no warranty can be made as to its accuracy or completeness. The information does not represent, warrant or imply that services, strategies or methods of analysis offered can or will predict future results, identify market tops or bottoms or insulate investors from losses. Past performance is not a guarantee of future results.  Investors should always consult their financial advisor before acting on any information contained in this newsletter.  The information provided is for illustrative purposes only.  The opinions expressed are those of the author(s) and not necessarily those of Geneos Wealth Management, Inc."