Political news often dominates the headlines, overshadowing other significant events like interest rate decisions by the Bank of Canada, which can have a more direct impact on investors. Election seasons in Canada and the US further shift the media’s focus, raising concerns among clients about potential market volatility.
Many clients are curious about the implications of the upcoming US presidential election (and the potential of a Canadian federal election now increased due to recent federal party developments). Kevin and I have had many questions from clients about the potential for increased volatility in November, the impact of different candidates winning or losing, and the subsequent effects on the Canadian economy and the Canadian dollar.
As financial advisors, our role is to contextualize these concerns by examining data, historical trends, and providing a solid foundation for understanding what the data says for your portfolio. While emotions are a natural part of being human, it’s crucial to address fears and anxieties when making investment decisions. To help alleviate worries about politics and elections, let’s turn to the data.
Examining returns and investment volatility is essential for assessing risk and reward. Vanguard, one of the world’s largest asset managers with over $7.5 trillion under management, has conducted extensive research on presidential election cycles due to the global significance of the US economy. Their research, dating back to 1860, found no statistical relationship between the performance of a 60% equity/40% bond portfolio in presidential election years versus non-election years.
During presidential election years, this portfolio’s returns averaged 8.7%, compared to 7.7% in non-election years. Although the periods differ, with 41 election years versus 122 non-election years, the data remains compelling. Focusing on the last 100 years, since 1926, stocks have risen an average of 11.6% during presidential election years, slightly outperforming the market’s average return of 10.3% in all years.
Contrary to popular belief, the months leading up to a presidential election do not exhibit a noticeable increase in volatility. From 1984 to 2020, the Standard & Poor’s 500 Index’s annualized volatility was 16.5% in the 100 days before a presidential election and 15.9% in the 100 days after, both lower than the average volatility of 17.9% for the entire research period.
Turning to Canada for a little data as well, even though the Canadian equity markets are only about 3% of the global total, for many Canadians, our home country bias means that Canadian stocks and bonds are a larger part of the investment pie. And when we look at the data, the political party in power doesn’t change the long-term outlook.
Looking at research from AGF Management Inc., there have been 16 federal elections since the first Trudeau was first elected Prime Minister more than 50 years ago. Of these, eight of the 10 terms served by Liberal Prime Ministers corresponded with positive TSX returns, our country’s primary benchmark for stocks, while four of the six served by Conservatives had positive returns as well.
The US stock market is valued at $50 trillion, with an annual GDP of $28 trillion. In comparison, Canada’s stock market is worth about $3 trillion, with a GDP of approximately $2.75 trillion. Given this scale, no single person or political party can control the markets or all aspects of our economies.
Public policy outcomes often show up on a lag, and in many cases, come with unintended consequences. As we’ve seen over the last few years, especially with inflation, interest rate rises, and now some lowering on the Canadian side, the economy and the markets can sometimes feel misaligned. It might give you an illusion of control to know your party is in power, but no one person or party is bigger than the stock market. We can’t predict how markets will react to who wins the US Presidential election or the Canadian federal election. There will be volatility at some point, regardless of who the president is.
While elections generate significant headlines, they should not prompt changes to your financial plan or portfolio strategy. It’s natural to have concerns about elections, but historical data suggests they are a nonissue for your portfolio and the markets. Focus on your long-term goals, and maintain a diversified portfolio with the appropriate asset allocation based on your stage of life, financial plan, and risk profile. You’ll feel better keeping politics out of your portfolio.
