We are often asked what one should do with their investments and retirement savings given the news of the day. It is a reasonable question, especially when inundated with headlines and their apparent impact on markets. In just the past few years, there has been no shortage of such headlines related to government shutdowns, debt ceiling debates, pandemic responses, policy responses to curb inflation, labor disputes…and so on. While it may seem premature, we anticipate similar questions will be raised in 2024 with a presidential election cycle that has already and surely will continue to garner a lot of attention.
Markets do not move in a straight line. Said differently: Volatility - up and down market gyrations – is normal, especially in the short-term, as investors overreact to headlines and speculate future events. We understand market turbulence can promote feelings of unease – that, too, is normal. History has shown us repeatedly that the investor who can remain rational and stay the course despite short-term unease will be rewarded.
Let's look at the U.S. presidential election cycle. Markets have endured 16 presidential elections since 1960, each with its own characteristics and politically charged and polarizing qualities. Markets typically experience increased volatility leading up to an election, with larger day-to-day moves seemingly correlated to candidates' standing in the polls and speculative outcomes based on proposed policies. While this often feels uncharacteristically volatile, the average market drawdown is typical. The chart below illustrates that the average market correction during years of presidential elections going back to 1960 is ~14% (blue bars). This is also the average intra-year market drawdown since 1980. The chart illustrates that markets typically rally over the 12 months following a presidential election year correction, regardless of political party (red bars). In 2016, markets rallied after the Republican candidate, Donald Trump, was elected. In 2020, markets rallied after the Democratic candidate, Joe Biden, was elected.
