Election and Market Returns

Elections and Market Returns

This column is scheduled to run on November 6th, but I’m writing it a week ahead, on October 28th, before the general election returns. I’m assuming that by the time you read this we’ll all know who will take the oath of office on January 20, 2021.

Much has been written and probably will be written about the election’s effect on the stock market. Presidents are somehow tied to the financial markets, despite having little to no control over yields and returns. Yes, a president nominates the chairman of the Federal Reserve, whose decisions tend to have economic affect. Whether a President wants to impose more or fewer regulations over trade and industry also likely has some influence on market performance.

But there are so many variables. Is the Presidential election determinative whether our 401(k) accounts increase over the next four years? Ten years?

Surprisingly, they don’t, according to research provided to me by Paul Weinstein, of the Weinstein Wilkes financial group in Fort Myers. He recently sent me an interesting review of US presidential elections on the stock market prepared by American Funds.

The findings are striking. The bottom line is that it doesn’t seem to matter whether the White House is occupied by a Democrat or Republican. The average annual return over 85 years was 11.9% for the fund promoted by the firm.

“There have always been tumultuous events,” the brochure reads. “The current economic and political challenges may seem unprecedented, but a look back shows that controversy and uncertainty have surrounded every campaign.” Overseas conflict and war, market declines and recessions, bankrupt businesses, weather related calamities, labor market struggles and civil unrest are nothing new to our nation. Yet market returns over time remain consistent if you’re in it for the long haul.

The brochure also tracks return of this particular investment fund for ten-year periods following each election since 1936. Every ten-year period experienced gains. The smallest existed from 2000-2009 (commencing at George W. Bush’s first term), while the largest was from 1980-1989 (commencing at Ronald Reagan’s first term), both Republicans.

Print, online and television news want to grab our attention. The core human emotions of fear and greed are ripened by headlines of market gyrations “caused” by presidential policies. While presidential policies can impact profits, yields and interest rates, which drive market returns, those aren’t the only factors.

The effects of presidential policies on your estate plan, however, can have direct impact. As I said at the beginning of this column, I wrote this not knowing who won the White House or Congress. A Democrat sweep could mean drastic changes to federal income taxes as well as federal gift and estate taxes.

In short, the federal exemptions may decrease while tax rates increase. This will be true regardless who won, as the current federal exemptions sunset at the end of 2025.

So hang on to your portfolio. Don’t try to time the market. But do pay attention to changes in the federal tax laws.

© Craig R. Hersch 2020

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