Investing in an Election Year

Election years are awkward times in different industries. Regarding investments, thinking long term is historically the better solution for personal investors.

At Correct Capital, we help individuals and families plan out their finances and investments. This episode of Capital Conversations dives into election cycles (for 2024) and how to react accordingly. We're joined with Colin Day and John Biedenstein.

For recent investment news and our take on the current market, retirement planning, and investment, listen to our podcast Capital Conversations or view our recent blog posts.

Below is the transcript of our most recent podcast, "Investing in an Election Year."

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Colin Day: Hi, everyone! Colin Day here, CERTIFIED FINANCIAL PLANNER™ professional with Correct Capital Wealth Management. With me today for another Capital Conversation is John Biedenstein. John, how are you?

John Biedenstein: I'm great today!

Colin Day: Just today, though?

John Biedenstein: Just today.

Colin Day: Okay. Well, is it because you're sitting in here recording a podcast with me?

John Biedenstein: It's hump day. We're filming on a Wednesday.

Colin Day: Oh, that is true. Okay--so the end is in sight, I guess we'll say. Today, John, we have a fun Capital Conversation. We are actually lending something (let's say) or borrowing something from Capital Group--otherwise known by many as American Funds. And today, what we want to talk about was this guide to investing in an election year because, John, you mentioned today is Wednesday, but it's also the beginning of February. And what's on most peoples' minds--if you were to watch the news media right now--is the election. We're nine months away and it sure seems like it's going to be tomorrow, doesn't it?

John Biedenstein: November 5th will be here sooner than you think.

Colin Day: Yes. So, what we wanted to do today was have a short conversation using the Capital Group piece to talk you through some of the major ideas when it comes to being an investor during the election cycle, believing perhaps, John, that there's more volatility during the election years, but we'll talk about that in a second. But also talking a little bit about how we as investors maybe can put on some blinders with some of the noise that we might be hearing throughout the media. So, John, why don't you start off with one of the slides you thought was most interesting?

John Biedenstein: So the first slide is, "Which political party has been better for investors during an election year?" And jump to the chase, the answer is "Neither." There's really no difference between whether it's a Republican in office or a Democratic Party candidate that wins the office. Candidly, what we've seen over time is investors have to make decisions in regards to if they want to stay the course. Oftentimes, if you stay the course and stay fully invested and the market continues to perform improving each year, doing the upward trend, that's been the typical best way for folks to see the best results historically. [The] American funds piece here goes through 22 different Presidential election cycles, so it's not just a look back of last year. It's really going into a little bit of history.

Colin Day: And for those that can't visualize what we're looking at here...this chart basically shows a hypothetical. So, a $1,000 investment back in 1930, was that 1933, John? So basically saying, "Hey, over these election cycles where different parties hold the presidential position, there really is, if you just look, it's kind of upward and to the right, it's shaded red and blue, but it's pretty consistent performance over time," I'd say.

John Biedenstein: Correct.

Colin Day: Sure. So what is the next slide, John, that you thought was interesting?

John Biedenstein: The next slide is "What typically happens to the stock market during an election year?" Now, one thing that the stock market does not like is uncertainty, and there is [an] amount of uncertainty during an election cycle. The level of uncertainty is typically seen as higher during the primary periods where the folks are choosing the candidate for both of the political parties.

This year, we're kind of through some of that there's getting to be a clear idea who those candidates are going to be for the two major parties. That primary period, which is typically where there's a higher level of uncertainty is really, it should be really lessened this cycle. So that might be a plus compared to where we've been in the past, but again, the market doesn't like uncertainty. We like more defined terms. We like earnings, growth, those types of things. So once we get out of the primary cycle and back into just an election year of two candidates going back and forth, that's where we see a little bit less volatility, and again, historically speaking, the markets are consistently performing on an upward trend.

Colin Day: Right. And the common refrain that I'm hearing from clients, John, is, there seems to be a lot more volatility in election years. And really the reality is that there's volatility every year. There are some trends when we think about where we think the market is going, which we'll talk about in just a moment. For the most part, the volatility in an election year, like where we are right now in 2024, it really isn't as different as anything else. It seems more pronounced, especially because we are hearing more about the election.

I think it's fair to say that much of the volatility is a perceived volatility than it is an actual one because we are front loaded with information that says, "Yes, we should be fearful of the market because 'blank' candidate is going to be elected next or this person is going to retain the presidency for another term." I think a lot of the confusion and some of the concern about investing around market cycles with elections in mind is, John, to put it simply, in your head. I don't know if you agree there.

John Biedenstein: And the media kind of blows everything out of proportion right now, especially if you pay attention to that. That's where you can get a little bit more worked up. I think that's where the concerns and making things bigger turns into a bigger deal.

Colin Day: Yeah, absolutely. That does lead me into the next slide that I'm going to address, which is when it comes to inflows of money. So when we think of, "I've got dollars in my bank account that I would like to put to work," John, I don't want it just sitting in my high yield savings account or probably [at] a pretty poor rate if it's in a checking account. I want to do something with it. Well, when does money move into the market? So if we think about election cycles, 2024 being the fourth year of a presidency, so for President Biden, we're in year four. We think about resetting next year, technically, in 2025 to the next four year election cycle period.

What we normally see is the first year of a presidential election cycle. That is where all the money comes into stock related investments. So what Capital Group is showing here is that the inflows, so I've got dollars that I want to put into the market, that is when money floods the market into investments. That's where, "Hey, I was sitting on a reserve of cash, now I wish to push that out."

And interestingly, we see that that lowers every year afterwards; until, in year four again, the election year just like where we are right now, that is the year when finally inflows into stocks is actually lower than what we see into cash-like instruments like money markets. So, a lot of the fears are, "Okay, a lot of those earnings are going to be front-loaded on this presidential cycle." But then once we start talking them out and we get through midterms, now we're stuck thinking, "Oh man, I don't know if that market's going to continue on, John. I'm too fearful. I'm going to stay on the sidelines. I'm going to put more money into my savings account. I'm not willing to put it into the stock market." When I saw this, I thought this was incredibly interesting. Mostly because this is what a lot of our clients are doing.

John Biedenstein: Correct. And it also noted that there was an inflow in both domestic US equities and international equities. So there's a flow of people [that] are investing on both sides of the ocean.

Colin Day: Right. And it's that belief that the U.S.--although we do participate in a global economy--the U.S. is a major player in that and they're a major influence. A rising tide should lift all boats, so to speak. So it's interesting for me to think that "Hey, just because it's 2024 [and] we're still nine months away from this thing even happening," but because we're in an election year, more people are going to be fearful than maybe in the previous three years of the election cycle. So finally, Oh, John, did you have something there?

John Biedenstein: And then the next question is the one where you look at somebody that's more concerned with things and maybe they pull money out of the market or they're more reluctant to keep contributions in money market funds for a longer period of time. So yeah, that's kind of the next question.

Colin Day: Absolutely. Because when we think about how we invest in these election years and who makes out better? So the final big thing that Capital Group put together and was talking about what is the best way to invest in election years? So they basically broke it down into three different kinds of categories.

So if I've got money in my pocket. It's in my bank account. I want to do something with it. So hypothetically, they looked after all these 22 election cycles and said I've got $1,000 on January 1st that I wish to put into the stock market (I believe in this case the S&P 500 tracking U.S. companies).

So if i've got $10,000 in this hypothetical example, how will my money grow depending on if I deploy it immediately all $10,000 on January 1st or if instead I take a thousand dollars every month and put it in for 10 months in a row, or if I say "No, no, I am way too nervous. I'm going to keep it on the sideline, John, I'm going to keep it in my money market fund." And then January 1st, the year following the election cycle, that's when I deploy it.

So then they tracked it for four years. They said, for example, let's say it is, well, let's go back one month. Let's say it was January, still John, of 2024. I have my $10,000. I put it in. In scenario two, I put only $1,000. When it hit February 1st, I put in another $1,000 for 10 months. And then it's January 2025 when it has been decided. The inaugural ball is right around the corner. That's when I'm going to put my $10,000 to work. So in those three scenarios--John, you tell us. Who won?

John Biedenstein: The winner is the person that stayed fully invested. But secondly, the investor that used dollar cost averaging for the $1,000 for the first ten months, they were in a very close second. So again, I'm more in the 401(k) space, 401(k)s are typically funded each payroll period or each month and that's what we call dollar cost averaging. So you're buying when the markets whether the market's high or low, you're taking your money from the payroll and making deposits in your 401(k) plan. Very much like the example here. So we typically see dollar cost averaging is where you're buying in and out or buying in throughout different periods of time can be beneficial.

So, but the person that stayed on the sidelines for a year, what happened to them?

Colin Day: Well, those people did "OK." They still put the money in though because--if you recall--that's when all the inflows are with equities is that first year as we hit the reset button on the election cycle so those people did enjoy growth over the next several years, but it wasn't as good as those people that either deployed it all immediately which is at January 1st of the beginning of the election year, or those people that were dollar cost averaging in--like you said--over the course of the year.

So for many investors, this is why we say just because it's an election year doesn't mean that we suddenly break strategy. For the majority of our clients that are either soon to be retirees or retirees, that's why we promote a certain level of risk in the account so that we can stay in the market as opposed to trying to time the market. Because trying to time the market is not always the best strategy for the long-term investor.

So, John, any other parting thoughts when we think about this report, the election year? I mean, I'm not asking for you to forecast who will win, but from an investigative standpoint. Any final words that you have for your listeners?

John Biedenstein: Again, we have this information. We'd be glad to provide it to you if you have any interest. So let us know about that.I will say that other than a year ago, it probably had 20--this is 22 years or 23-- you had one year last year these results are pretty much the same every election cycle. So we talk about this, but the reality is [that] it all comes down to the same thing. And our belief is long term investing pays off and, and that's kind of what this implies or kind of confirms.

Colin Day: Yes, exactly. So thank you very much for watching or for listening. Regardless of how you're viewing or listening to us, we appreciate you. Please let us know if you have ideas for future podcast episodes--we are always looking for more information, from you all because you're the ones that are appreciating, hopefully, what we're saying. So for John Biedenstein, I'm Colin Day. Thanks again for joining us on Capital Conversations.

The opinions expressed in this program are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security. It is only intended to provide education about the financial industry. To determine which investments may be appropriate for you, consult your financial advisor prior to investing.

As always, please remember investing involves risk and possible loss of principal capital. Please seek advice from a licensed professional. Correct Capital Wealth Management is a registered investment advisor. Advisory services are only offered.

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Correct Capital understands that everyone's financial journey is different. It's important that every one of our clients receives the attention they deserve to meet and exceed their financial goals. Don't hesitate to reach out to Correct Capital today online or to give us a call at 877-930-4015 to learn more about investing during an election year.