Elections Impact on the Stock Market

2020 has obviously been a crazy year, and with the Presidential Election coming up, it is not about to calm down anytime soon.  The stock market has been a thrill ride ever since late February, with a big drop and then a steady climb.  Tech stocks and Large US stocks have already made it back in the positive territory for the year, while small stocks and international stocks are still lagging.

With that as the backdrop, I have gotten the question “How will the presidential election affect the market?” pretty often.   For questions like this I am glad I have my crystal ball with me at all times so I can tell my clients exactly what is going to happen.  O wait, I don’t have a crystal ball. But we can learn from history.

Historic Election Year Returns

Looking back at election years since 1928, the S&P 500 (Large US Stocks) has had a positive return 21 times, and a negative return 3 times (1).  I think most people would find that hard to believe.

Is there significantly better or worse returns during election years or the year after an election?

The average annual return of the S&P from 1928-2017 was 9.8%. The average return during election years and during the subsequent year were 11.3% and 9.9%, with plenty of volatility. If there was truth to the above speculations, we would consistently see extraordinarily high or low returns during election year followed by a reversal the following year. The data does not bear that out, and there is nothing in the above data that should lead an investor to make any tactical changes to their portfolio during or after election years. (3)

Republican vs Democrat

This is another interesting topic that divides people throughout the country, but is there any stock market effect based on which party gets into power?  The data actually surprised me.  From 1926 to 2019, we have had a Republican president for 46 years, and a Democratic president for 48 years.  The average annual return for the S&P 500 index when we had a Republican President was 9.12%. When we had a Democratic President, the S&P 500 averaged 14.94% per year. (2)

Whatever your political leanings are, this should give you solace knowing that average returns are over 9% long term no matter which party is in the white house.

False Patterns

The worst thing an investor can do is get caught up in trying to find and take advantage of patterns in the stock market.  It seems like a good idea, but trust me, it is not in your best interest.   For example, there is a super bowl stock market predictor, which states that if the team that wins the Superbowl is a team that had its roots in the original National Football League, then the stock market will decline.   There is another pattern showing that every mid decade year ending in 5 (1905, 1915, 1925 etc.) since 1905, has been an up year for stocks. (1)  These patterns are just random facts that people try to turn into something that seems important.

The Story of 2016

The 2016 election was a great example of this. Many financial experts and talking heads were predicting a decline in the market if Trump won. On Fortune.com, Katie Reilly reported that Citigroup predicted that a Trump win would have a negative effect on the stock market, believing the S&P 500 index would fall 3% to 5% if Trump was elected. Evelyn Cheng reported on CNBC the day before the election that JP Morgan, Barclays, Citi, and BMO all expected a Trump victory would have a negative impact on the stock market, with Barclays being as bold as saying the S&P 500 could potentially fall 11 to 13 percent. Some went even further with their market predictions.

In an interview with Neil Cavuto, noted billionaire Mark Cuban stated:

“In the event Donald wins, I have no doubt in my mind the market tanks,” Cuban said. “If the polls look like there’s a decent chance that Donald could win, I’ll put a huge hedge on that’s over 100% of my equity positions… that protects me just in case he wins.”

To the surprise of these pundits, the opposite occurred.  In just 2 months from November 1st through the end of the year, equity markets had a substantial growth period, with the S&P rising 6%, the Russell 2000 up 14% and the Russell 2000 Value increasing by 18%. (3)

In Conclusion

So the best and most honest answer to the question “How will the presidential election affect the market?”, is “I don’t know, but over the long term, stocks have made between 9 and 12% per year on average.”

By Jimmy Hancock

References

1.Anspach, Dana. “How Does the Stock Market Perform During Election Years?” The Balance. About Inc., 16 Oct. 2016. Web. 01 Nov. 2016.

2.French, Bob. “Are Republicans or Democrats Better for the Stock Market?” McLean Asset Management, 10 July 2020, www.mcleanam.com/are-republicans-or-democrats-better-for-the-stock-market/.

3. Gatliff, Kenny. On the Money, 23 Sept. 2020, on-themoney.com/2020/08/11/presidential-elections-and-the-market/.

Is your Investment Advisor a Bully?

Wall Street Bullies are not just found in New York City, they are found in investment brokerages throughout the country.  In fact, your investment guy, might just be a wall street bully.

I explain a Wall Street Bully as an individual or institution that uses fear, greed, intimidation, and misleading information to get an investor to act in a certain way.

The core issue behind all of this is that people that work on wall street make money every time there is a trade made on stock or other security.   Acting like any salesman, it is in their best interest to get people to buy and sell every week, every day, every hour.  But the problem is, actively trading by buying and selling on impulse is not in the best interest of the long term investor.

Wall Street Bullies try to take advantage of under educated and uninformed investors by instilling fear in them and getting them to become short term focused even when they are long term investors.  They create the illusion that they are genius’s that can outsmart the market with little to no risk if you just trust them.  There are 3 main types of Wall Street Bullies as stated by Mark Matson in his book “Main Street Money”.

The 3 types of Wall Street Bullies

The Conman

This is the easiest one to identify, at least after they have been convicted.  Think of Bernie Madoff.  These people gain your trust with a great reputation and promise you great returns with no risk or downside.  If it seems to good to be true, it probably is.  Often times these con men send out false statements showing growth when in reality they are stealing your money.

The way to protect yourself from a con man is to never allow someone to manage your money that does not use a third party custodian to hold the money.  Without a third party custodian, the fox is guarding the hen house.   There were a lot of so called “sophisticated” investors who got caught up in the Bernie Madoff scheme and lost millions of dollars.

The Prognosticator

There is no shortage of self proclaimed genius fortune tellers who will convincingly claim that they know exactly what is going to happen in the stock market in the short term future.  They pull out charts, graphs, economic theories and data galore.  Investing in the stock market would be a whole lot easier if these “experts” really could predict the short term future.  Ultimately they are trying to sell newsletters or get media attention for their hedge fund or alternative strategy they are selling.

If your portfolio needs a prediction about the future to be successful, it is already broken.  If anyone tells you they know what the market is going to do in the next few days, or next few months, don’t walk, run away.

The Guru

These are the sharply dressed people you see on the front cover of any investment magazine.  They are the ones have beaten the market in the past and think they can continue to do it forever.  They are reported to have amazing insights into which stocks are undervalued and which stocks to stay away from.  But the issue here is, there is ZERO correlation between a Guru’s market beating performance in the past and his ability to do it in the future.

Guru’s are the most common form of Wall Street Bully.  Many investment advisor’s, Brokers, and money managers claim to be guru’s who study and pick the best stocks that will beat the market as a whole.  Staying away from them can be hard, but instead, you should work with a investment coach who educates you on why stock picking is not necessary to have a successful long term portfolio.

What should you do?

At Preferred Retirement Options, we call it Bully Proofing Your Portfolio.  Not all investment professionals are Wall Street Bullies.  We help our investors follow the simple rules of investing, which are own equities, diversify, rebalance.  No crystal ball is necessary.

By Jimmy Hancock

References

  1. Matson, Mark E. “1.” Main Street Money: How to Outwit, Outsmart & out Invest the Wall Street Bullies. Cincinnati, OH: McGriff Pub., 2012. 3-5. Print.



3 Tips for Millennial’s Looking to Invest

When it comes to Millennial’s and their money, most would rather sit on a boat load of cash. They have a sinking feeling that investing in the stock market is like boarding the Titanic. According to a recent Bankrate.com study cited by a recent The Street article, 1.  younger people prefer bank accounts over stock investments. Of course, cash is a low-yielding investment that’s better reserved for retirees who just want don’t want any risk. How does a young person get over his or her aversion to the stock market?

1. Investing instead of trading

One way a young investor can get over their fear of losing money in the stock market is by taking a long-term approach. Trading stocks is not the same as investing in the market. Most of the horror stories of people who lost fortunes occurred because they either “bet” money on a penny stock, or sold out of a crashing market and never got back in for the big run up that always occurs after crashes.  Smart investors contribute a certain amount of money on a regular basis so that they build up shares in diversified mutual funds over time.

2. Not worrying about an immediate reward

A lot of younger people are used to experience immediate gratification because of our highly technical world and consumer-driven society. But investing in stocks can be frustrating in the short term if the market is not climbing at that particular time.  Focus on the long term not the immediate reward.  If you can be patient, there is a huge reward for investing long term in stocks.

3. Diversifying from the start

When trying to figure out how to invest their money, some young people are lost. Their default option is a savings account or possibly certificate of deposits at a bank.  These should not be your default option as they give you very low returns long term.  One way to have a diversified portfolio is by choosing a mutual fund that already includes a variety of different stocks in different sectors and countries and also short term bonds. You can hold highly diversified mutual funds within a 401(k), Roth IRA or many other retirement or regular investment accounts.  With our company there is no minimums to start an investment, and we offer extremely diversified mutual funds, which means you can own over 12,000 stocks as a beginning investor with just a little money to start putting away.

Saving money through a bank account is the equivalent of putting cash under the mattress or burying it in your backyard. Millennial’s are too smart not to find better ways to invest their money.

By Jimmy Hancock



References

  1. O’connel, Brian. “Young Americans Prefer Bank Investments, Not Stock Market.” TheStreet. N.p., 23 July 2014. Web. 07 Mar. 2016.

First Half of 2017 Market Recap

2017 is more than half over now, and a lot has happened.  In case you haven’t heard, international stocks are killing it.  The Matson Money International Fund is up almost 14% through the first half of the year.   The following is commentary from Matson Money on the 2nd quarter in the markets.

The 2nd quarter of 2017 saw a continued increase in broad equity markets, both at home and internationally. During this time period, U.S. stocks grew by 3.09% as represented by the S&P 500 index, and for a second consecutive  quarter, international stocks fared even better, with the MSCI EAFE index  returning 6.37% for the quarter. After lagging behind for much of the previous couple of years, Emerging Market stocks once again led the way over  developed markets for the 2nd consecutive quarter. The MSCI Emerging Markets Index saw a return of 6.38% for the quarter, and is now up over 18%  year to date.

Over the course of the last year, we’ve seen strong market returns, the  lowest unemployment numbers we’ve seen in recent history, and continued low interest rates and low inflation. By almost any normal metric the economy  is looking very healthy and has for quite some time. During extended time  periods of good economic data and favorable stock returns, investors can sometimes begin to feel euphoric – like things will stay good forever. In fact,  over the last 18 fiscal quarters, the S&P 500 had a positive return in 17 of them, with only one negative return in the 3rd quarter of 2015.

In times when markets are down and seem as if they are never coming back up, we stress  that it’s extremely important not to lose sight of one’s long term goals, not  to panic, and to use downside volatility as an opportunity to rebalance and buy  more equities. These same principles apply during bull markets as well. That  euphoric feeling that investors can feel when it seems like markets will go up  forever can lead to imprudent decisions in the same way fear can in a down  market. Investors tend to overestimate their aversity to risk in these market  conditions and take on greater exposure to equities than their true risk tolerance would dictate. In both scenarios, it is important to not get caught up  in recency bias – assuming that whatever is happening in the short term will persist into the long term. Short term trends are just that – short term.  Throughout the life of the stock market bull markets have been followed by bear markets and vice versa many times over.

It is an important distinction to understand the difference between academically proven ways in which  markets move as compared to short term trends. Over the long term, equities have outperformed risk free investments such as treasury bills, but this is not going to be true over every short time period. Similarly, small stocks and value stocks have outperformed large stocks and growth stocks respectively, but again, this isn’t necessarily true over the short term. In fact, looking back historically, sometimes investors have had to wait many years before these  various premiums have shown up, but the prudent investor who understood  that these premiums are pervasive in the long term and have ignored short  term trends have very often been rewarded for doing so. That is why it is so  important to own a diversified portfolio built specifically for your personal risk  tolerance, to stay prudent and to keep that portfolio through the ups and  downs of the market, and to rebalance when the opportunity presents itself.

In the end, choosing a wise financial strategy – and sticking to it – can have  tremendous impact on an investor’s long term financial health. Chasing  performance through buying and selling is a risky game. Historically speaking,  it will only reduce an investor’s real return. Relying on unbiased, non-emotional advice from a trusted investor coach to make good decisions can help an investor bridge that gap between what the average investor makes  and the return of the market.

By Jimmy Hancock

References

  1. Matson Money. “Account Statement.” Letter to James Hancock. 20 Apr. 2017. MS.