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Monthly Investment Outlook - Election Year: What Investors Should Know

Wells Fargo Investment Institute - January 2020

Presenter: Charlotte Woodhams, Investment Strategy Analyst, Wells Fargo Investment Institute

Transcript: Election Year: What Investors Should Know

Title graphic: Historical patterns in presidential election years

As the 2020 presidential election campaign enters its final year, historical election cycle trends may provide helpful guidance for investors during the campaign’s final months. U.S. equity markets have generally proved positive during presidential election cycle years. We believe that a healthy U.S. economy can be a useful gauge of whether the party in the White House is likely to stay in office.

Likewise, the political landscape can change in the year before a presidential election: polling results early on in a campaign do not necessarily predict either party’s nominee or the eventual Election Day winner.

Title graphic: Presidential election years often coincide with positive equity markets

Since 1928, only 4 of the 23 presidential election years have coincided with negative S&P 500 Index returns. Two of these four election years occurred during U.S. economic depression (in 1932) and recession (in 2008), while a third occurred during the recovery of the Great Depression (in 1940). This historical trend suggests to us that as long as the U.S. economy continues to grow and international events do not impede, equity markets have the potential to rise during presidential election years.

How do equity markets change during a presidential election year?

Chart on screen: Stock and bond performance during presidential election years

The average pattern of equity prices during presidential election years has differed between the periods of January to July and July to November. Looking back since 1900, equity prices have tended to be flat during the first part of the year, but have tended to rally during the second part of an election year (on average), as the chart shows. This pattern suggests some equity market uncertainty about the presidential race during the first half of the year, but by summer, additional clarity on the race from the primaries, conventions, and debates has proven positive (on average) for equity prices.

Title graphic: Unreliable predictors of presidential election results

History also shows that during past presidential election cycles, early polls have not correlated strongly with the party nomination or the eventual winner on Election Day. There are many factors that may change for candidates between now and November: for example, fundraising could dry up, there may be a poor debate performance, new issues might move to the top of voters’ minds, and the political landscape could simply shift as the presidential primaries begin. It is important to keep in mind that extrapolating current polls or leads has historically proven faulty, as there is a lot of ground to cover until Election Day. Meaningful change may occur over the months preceding a presidential election, and we believe that investors should not make portfolio adjustments based on presidential election scenarios while still almost a year before Election Day.