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.
Maintaining perspective can be challenging but in a time of crisis, it is even harder because emotions run high. Every election seems to be painted as a crisis. We are pummeled with conflicting messages daily and as we approach election day; the messages turn more dire. People want to know what is going on and be well-informed but if not careful, they can get worked up as they consume information.
The challenge for advisors is counselling clients who have completely bought into their candidate’s pitch and fear their ticket is likely to lose. Past performance of the economy and markets and the other elements of the backdrop of the election don’t matter much to these clients.
It doesn’t matter that all politicians give the pitch. It doesn’t matter that markets don’t behave differently around elections than during other times. It doesn’t matter that America has survived all prior presidents and crises. Why? Because, wait for it…”this time is different.”
This idea is really tough to respond to because this time really is different, sort of. These players and plot lines are unique. There is truth in some of the allegations levied against the candidates. Clients will believe what they want to believe. Confirmation bias is alive and well and on glaring display right now. Clients standing on the ledge don’t see their bias at all.
In past elections, with clients who have fully bought what their preferred candidate is selling and believed doom was imminent because their guy was going to lose, frankly, I have had little success in calming them down. They just keep going back to “yeah but this is different” and I cannot prove or promise a client there won’t be a massive recession or nasty bear market.
We started warning clients of a 2020 media circus in the summer of last year. We pointed out that our clients’ feelings about the candidates are not particularly good guides to making decisions about their portfolio. Neither are our feelings as advisors. The market doesn’t care what we think individually.
We haven’t been able to bring calm, but we have had some success getting clients to stick to their plans. We remind clients that their investment lifetime far exceeds the term of any elected official. We also remind them that they chose to approach markets with a long-term perspective in large part because they didn’t want to be in the business of trying to time the markets. That is one reason they hired us.
We ask them how they feel after watching cable news. The answer is almost always gravely concerned for the country and the future their kids and grandkids will inherit. We’ve had more than a few tell us their moods have improved by turning off the TV. But some are so worried, they just can’t do it.
It helps that they have all been wrong about what they thought markets would do in the past. They can see being wrong about the market’s behavior can be costly.
The president is often called the most powerful man in the world, but presidents don’t run the markets. Investors don’t invest in political parties, they invest in businesses. Businesses adapt to changes and work to serve their customers and create value for their shareholders. That’s why markets tend to rise over time despite obstacles politicians may put in place. This undeniable evidence of success for well-diversified, well-balanced, disciplined, patient investors makes taking a long-term view a prudent approach.
Thinking through the whys about how to approach markets helps clients remember that being a successful long-term investor is hard but being a short-term trader is harder. Good luck and please vote.
Dan Moisand, CFP, has been featured as one of America’s top independent financial planners by Financial Planning, Financial Advisor, Investment Advisor, Investment News, Journal of Financial Planning, Accounting Today, Research, Wealth Manager, and Worth magazines. He practices in Melbourne, Fla. You can reach him at [email protected].