Handicapping Election Years Is a Dangerous Game
There are surely some people, perhaps even a majority, who would bet that the market would have a bad year with that kind of economic and political environment. But those who did make that bet would have lost out on a terrific year if they had sold their stocks, and now they’ll have to buy back in at much higher prices.
It’s now 2024, and the usual prognosticators and pundits are making their predictions about the markets (and the world) once again. We generally stay away from predicting events, let alone what their impact will be. But this year, we can make one prediction about the market with some confidence: when the reports on investor performance versus the market averages are released in a few months, it will find that the average American retail fund investor will have underperformed the market indexes yet again in 2023.
And we will make another prediction: 2024 will be another underperforming year for the average investor. With the exception of the Fed’s announcement that it intends to cut rates sometime in 2024, the other bad news generally remains bad, and Bankrates’ December survey of leading economists found that 45% of them expect a recession this year. That may finally kill inflation, but it’s also likely to kill corporate profits, the key driver of market returns. Bad news and bad behaviors lead to market timing, a bad idea.
2024 is (surprise!) also a general election year, and the people love to speculate not only on who will win but what it will mean for the economy, jobs, and stocks. How much do they love it? A record $564 million was bet on the 2020 tilt. To put that in perspective, only $154.7 million was wagered on the Super Bowl that year.
Do we expect that some will move money into or out of the market as the year develops? Yes, we do. Warren Buffett famously said, “In the short run, the market is a voting machine, but in the long run it is a weighing machine,” and he seems to have captured the essence of a system with inherent short-term volatility but long-term upward bias. Nearly one of every three calendar years has been down for the S&P 500, yet it has averaged a gain of about 10% per year since World War II.
“Silly Season” or Just Plain Silly?
According to the Oxford English Dictionary, the term “silly season” was coined in 1861 to describe the quiet news period in Summer when the editorial content of The Times became insipid. Older readers will remember when the U.S. presidential elections didn’t really get into high gear until after Labor Day. The summer months leading up to that unofficial start came to be known as our own silly season due to the outlandish claims and electoral high jinks of candidates seeking attention.
Some Americans long for a return to the days of seasonal politics and would enjoy a quiet news period now and again. Since the Internet was fully formed, those days are over, and campaigns begin for the next cycle the day after votes are cast. Outrage has become an everyday thing, and politics seems to lead every news cycle. A look back at previous elections may give comfort to those who are concerned that 2024 will be “the most important election of our lives.”
To be sure, there are some important things on the line this cycle. The Trump tax cuts will expire in 2025, for one thing. Energy policy is another and can profoundly affect U.S. employment, inflation, and geopolitical events. Healthcare costs, defense spending, and debt are also hot-button issues for many. But we would point out that there is always a fight, and often, there are great issues of concern, but these things don’t seem to have much impact on stocks.
Since 1928, the average total return of the S&P 500 during presidential election years was 11.28%. This period saw some truly momentous events, yet you may be surprised to see what actually happened to stock prices—even if you were alive and voting when they happened.
In 1976, Gerald Ford ran against Jimmy Carter. Ford had pardoned Richard Nixon, and America was in the throes of the Watergate scandal. In 1975, America’s misadventure in Vietnam came to its bitter conclusion. OPEC’s oil embargo, which ended in January 1974, led to a massive increase in the cost of crude oil and began the inflation years. What happened to stocks? The S&P 500 was up 23.8%.
In 1952, America was a political mess. The Red Scare was sweeping through Washington and Hollywood. The U.S. was in a cold war with the Soviets and a hot war in Korea. Eisenhower won a landslide over Stevenson, and the market was up 18.4%.
John F. Kennedy was assassinated in November of 1963, ushering in an ugly period in American politics that would last nearly a generation. The Cold War had reached a crisis in the Bay of Pigs, and nuclear war was on everyone’s minds. School kids across the U.S. practiced “civil defense alerts,” diving under their desks. Johnson won a massive landslide over Goldwater, and the market was up 16.5%.
Even those who voted in 1980 may not remember that Jimmy Carter was ahead of Ronald Reagan in the Gallup poll one week before their election. 1980 was the “malaise” year, the year of stagflation, of the Iranian hostage debacle, of the Olympics boycott, and just one year after the second OPEC embargo. The S&P 500 was up 32.4% for the year.
Assassination, hot wars, cold wars, stagflation, energy crises, impeachments: the U.S. has had its share of drama. Through it all, the engine of the American economy has continued to build wealth. Nineteen of the 23 elections since the S&P 500 was created have been up years. Contrast that 83% winning record with the market’s overall average of just 33%.
Will 2024 be another up year for stocks? Who knows? Stocks were down in ‘32 (the Great Depression, -8.2%), ‘40 (war in Europe and Asia, -9.8%), 2000 (the Tech Wreck, -9.1%), and ‘08 (the Great Recession, -37%). Sometimes bad news leads to bad years, sometimes to good years. The takeaway is simple but profoundly important: focus on the long-term performance of the market, and things work out eventually.
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