Most of the time, the phrase “this time is different” is an instant eye-roller. Experienced advisors have seen too many people make bad decisions based on this idea. As advisors, we tend to be tuned into financial media on a regular basis so we get used to hearing that we should forget the long-term and if we don’t make a move now, suffering will occur. By asking clients to expect to hear this, we have been able to keep most of our clients on a prudent path.
We have come to expect a portion of our client base will struggle with keeping a long-term view when markets drop precipitously. Outside of those times, it is unusual for clients to wonder if they should scrap proven approaches and become market timers. The major exception to this normally rational state comes every two years when we have elections. Presidential elections are the worst and 2020 seems more even intense than past elections.
The media serves important roles in society but fostering patience and discipline doesn’t seem to be one of them. Electing a president is a big deal, of course, but every four years it seems like some forget that the pitch from the candidates is basically the same every time, “My opponent is stupid, unethical, both or worse, and if he wins, bad things will happen. You should fear him and his policies and remember that anything you like or wish for that is good only exists because I kept my opponent from screwing it all up.” If you watched the first debate and could make out what they were saying as they talked over each other, you heard this pitch over and over.
The language used by candidates, their supporters, and in the ads are often much stronger than what I just wrote. The negative messaging dominates. Each side tossing out their own version of facts and data. It is no wonder elections cause angst. It all makes the “this time is different” line more likely to be uttered or acted upon. It happens every election cycle.
For what it’s worth, the data does not support the idea that trading around an election is a good idea. A recent Vanguard piece echoes other examinations of market behavior around elections. They started with 1860 and found “no statistical difference” between portfolio performance during election years and performance during non-election years.
Despite the amped up rhetoric over the last few decades, markets haven’t been as volatile around elections as many fear. According to Vanguard, since 1964 annualized volatility of the S&P 500 was 13.8% over the 100 days leading up to election day. In the 100 days after the election the volatility was also 13.8%. This is actually less volatility than the 15.7% experienced over the entire period.
Each candidate is trying to argue that they can produce a good economy and their opponent will send us into a recession. Maybe I am forgetting someone, but I can’t recall a president that didn’t want the economy to be strong. Yet, the track record is clear, since Calvin Coolidge, only Johnson and Clinton were spared having to deal with a recession during their administration.
As 2020 demonstrates once again, the stock market and the economy do not move in lock step. Nonetheless, presidents have not avoided bad market environments. What is now the S&P 500 started in 1926 during the Coolidge administration. Coolidge left office before the crash of ’29 but every president since except Clinton and single termers Carter and Bush did not have to navigate a bear market at some point. Even then, both Bush and Clinton saw declines of 19% in the index, narrowly missing the bear market threshold.
On the plus side, markets rise more than they fall. A dollar invested at the onset of the S&P 500 would have reached an all-time high at some point during the service of every single president. During that stretch, there have been only two years (1977 and 1994) during which the S&P 500 did not have at least a 10%+ increase during the year.
Markets are volatile. Up and down providing plenty of data points to claim credit or place blame. Clients need to have a plan for dealing with market drops regardless of whether they come around elections or at other times. In both cases, the range of outcomes is very wide and large drops are common.
The biggest communication change at our firm over the last decade or so has been increasing our messaging about the media and working with clients to develop more resilience when ingesting news. Most people understand they should focus on what they can control but many do not recognize that they can control their intake of news and their reaction to the new they take in. Preparing clients to be in the financial markets must include coaching on the role of media in their decision making.