Election on the Horizon
With a contentious political environment here in the United States, many investors have been questioning how their portfolios should be positioned with the upcoming presidential election. Many are concerned about how markets will react to changes in the White House. As advisors, we often look to the past for guidance on whether or not adjustments should be made to our portfolio allocations ahead of this event.
The following graphic from Dimensional Fund Advisors shows how the US stock market has behaved in the year of an election and the year following an election.
My first takeaway from the graph is how few data points we have to look to in history to gain any actionable insight. Secondly, from the above data, there is no discernable pattern that can be seen. Many election years, regardless of the winning party, have shown varied results.
If it were easy to outperform the market during election years, evidence should be present in professional fund managers’ ability to beat the market. One study which monitors the performance of active mutual fund managers against their benchmark indices is published by S&P Dow Jones Indices, called the “SPIVA U.S. Scorecard.” In the latest year-end report from 2019, annual results are published.
The following is an excerpt of the data from the report showing the percentage of active large-cap professional managers who underperformed their respective benchmark. Unlike index managers, active managers are judged based upon their ability to deliver above-market returns in their asset class.
In the above data, I have highlighted the years of presidential elections (in yellow) and the years following presidential elections (in orange). As can be seen, most active managers of large-cap mutual funds underperform during election years, and the results are mixed for years following election years.
Over longer periods, a larger percentage of funds underperformed benchmarks, suggesting many of the funds were not consistent in beating the benchmark. This can be seen in the table below for large US companies. Results for other asset classes over longer periods were fairly consistent with the large-cap findings.
This is part of the reason why we do not believe it is a worthwhile endeavor to adjust portfolios ahead of elections to try to beat the market. We must also keep in mind the election is just one of many variables which affect the market. Instead, we believe investors should continue to be disciplined in their portfolio approach and rebalance periodically, instead of trying to predict the presidential election.