Aug 27, 2019

Mid-Year Review and Presidential Election Stock Returns

Aug 27, 2019
Mark R. Gordon — JD, MPP, CFP®, CFA
Chief Investment Officer
Thus far, 2019 has been a very good year in the capital markets. Both stocks and bonds have provided healthy returns for investors. Despite the solid numbers, we’ve sensed some apprehension among clients: an increasing number of folks have asked questions regarding what investors might face in the next 18 months. Investors are especially interested in whether to plan for what appears to be a long and hard-hitting presidential season and election. Today we’ll review the investment returns from the first half of the year and look back over past US presidential election years to see whether we can discern any patterns in returns or volatility.

Capital Markets 2019: Healthy Returns Continue
In the second quarter of 2019, stocks continued their year-long climb: global equities rose just over 3.5% and are now up over 16% as of the end of June.1 Domestic stocks fared marginally better than international equities. Last quarter, large US companies went up over 4% and, year-to-date, are up over 18%.2 Developed-foreign stocks rose over 3.5% and are up 14% year-to-date.3 Emerging-markets stocks rose under 1% and, as of the end of the quarter, are up more than 10%.4 The US bond market also went up significantly during the first half of the year. US bonds rose about 3% in each of the first two quarters and is now up over 6% for the year.5

Differences Within Stocks and Bonds
Diving below the top-line numbers, we see large differences between groups of stocks. Across the globe, large and growth companies fared better than small and value. For example, US large-growth companies returned over 21% through the end of June,6 materially higher than domestic small-value companies that rose “only” 13.5% in the same six months.7 We typically tilt our client portfolios toward small and value companies because, over time, we believe they have higher expected returns. But as we’ve discussed, actual returns can differ greatly from our expectations, and have done so thus far this year.8

We’ve seen a similar phenomenon in the bond market. This year, longer bonds and lower-credit bonds have enjoyed higher returns than shorter and higher quality bonds. We believe that bonds should act as ballast during times of stress and, thus, typically recommend clients hold short, high-quality bonds. That means that, during years like 2019, our bond portfolios may provide returns more modest than the overall market.

Stock Market Returns in Presidential Election Years
We have begun the 2020 presidential election campaign. Unsurprisingly, some clients have started thinking ahead and wondering how the equity markets might react next year. The short answer: higher expected volatility and average expected returns. Although we can’t predict the future, we can peer into the past to examine whether election years, as a group, have been materially different than others.

They haven’t. Since 1926, US stocks have had a positive return in any 12-month period approximately 70% of the time.9 If we look at all 23 presidential election years since 1928, we see that stocks fell only 4 times.10 Thus, US stocks rose about 83% of the time – better than average. Moreover, annualized election-year returns (9.9%) are virtually indistinguishable from overall historical returns (10.1%).11

Does this mean we’re in for an “ordinary” year? Probably not. Some academic research indicates that election uncertainty can translate into extra volatility.12 It appears that close elections tend to come with higher stock volatility.

This makes sense. Take for example health insurance. Most of the major Democratic candidates have articulated healthcare plans contemplating a larger role for the federal government. Regardless of whether one views this as positive, a “Medicare for All” type plan will likely have an adverse impact on the profits of health insurance companies. Therefore, in a close election, information favoring one candidate over the other may have a relatively large impact on insurance-company stock prices.

The same holds true generally: any individual poll can move the stock price of one or many companies if analysts believe the candidates have materially different policies. It’s early, but we believe it’s fair to say the major-party candidates will likely promote very different plans for government and its role in the economy. If the academics are correct, history suggests we should expect extra volatility but neither above- nor below-average returns.13 Our advice: buckle up, vote for your preferred candidate, and try to tune out the noise.


1 Global stocks represented by the MSCI All Country World Index. All index data taken from Morningstar unless otherwise noted. Past performance is no guarantee of future results.
2 Represented by the S&P 500.
3 Represented by the MSCI EAFE Index.
4 Represented by the MSCI EM Index
5 The US bond market is represented by the Bloomberg Barclay’s US Aggregate Bond Index.
6 Represented by the Russell 1000 Growth Index.
7 Represented by the Russell 2000 Value Index
8 Each of our client portfolios is unique and, thus, we can’t make general statements about investment performance. If you have questions regarding your investment returns, please talk with your advisor. Past performance is no guarantee of future results.
9 Dimensional Fund Advisors LP, examining S&P 500 returns for all overlapping periods from July 1926 to December 2018.
10 Anspach, Stock Market Performance During Presidential Elections, Feb. 8, 2019, citing Dimension Fund Advisors LP data.
11 S&P 500 annualized returns since 1926 per the DFA Returns 2.0 program.
12 See, e.g., Bowes, Stock Market Volatility and Presidential Election Uncertainty: Evidence from Political Futures Markets, The Journal of Applied Business Research Jan/Fab 2018.
13 Election-year returns have ranged from large gains to large losses. We do not predict “average” returns next year. Rather, we simply note that election years per se don’t have expected returns higher or lower than average.