#46 | Stock Market History During Presidential Election Cycles

Jon (00:05):

Welcome back to Protecting and Preserving Wealth, I’m Jon Gay. I’m joined today by Bruce Hosler and Alex Koury of Hosler Wealth Management. Gentlemen, good morning. Good to be with you.

Bruce Hosler (00:12):

Good morning, Jon.

Alex Koury (00:13):

Hey, Jon. Good morning, buddy.

Jon (00:15):

So, as we’re gearing up for another presidential election season, and if you’ve been living under a rock, we have an election this year. A lot of investors are concerned about the direction of our country, certainly.

We seemingly have a very divided country, again, if you’ve been living under a rock. And folks are concerned about how their stocks may perform under different presidents, different results of our election this year. Some feel they’d rather stay out of the market for a fear of a market crash if the “wrong president” is elected.

Bruce and Alex are here today to discuss the history of the stock market during presidential election years and what you should know when it comes to your wealth and retirement maybe offer some perspective.

So, Bruce, how does the market typically perform during an election year and, really, does the market care who is elected president?

Bruce Hosler (00:58):

Well, I think, first of all, let’s focus on the fundamentals. Right now, there’s about $5 trillion sitting in cash on the sidelines. And one of the underlying facts that we need to remember about that is that the Fed has raised interest rates due to inflation, and those higher interest rates are now paying people 5% or more for their cash sitting on the sidelines.

So, they’re like, “I’m kind of concerned about the world. There are multiple wars going on. I’m concerned what the market may do.” And so, it’s not just the election, there’s other things that are causing them to be concerned. They’re sitting on the sidelines.

But regarding the election year, when we look at election years, and let’s say it’s a four-year cycle for presidential elections, generally the election year itself is not a bad year. Historically, we see around an 11.6% as an average rate of return that is received in the stock market on those presidential election years.

Jon (02:03):

I know I’m thinking about the savings account that I opened up in the last couple years with interest rates being high, I’ve got some of my money sitting in cash. That’s the first time that I can remember that I’ve done that.

So, with what Bruce has said in mind Alex, on average, how do U.S. stocks perform across election cycles?

Alex Koury (02:19):

So, as Bruce mentioned earlier, during presidential election years, going back to January 1st of 1926, all the way through December 31st of 2023, the average return over the presidential election year is 11.6% as Bruce had mentioned.

Now, what we tend to see is a very tepid or weak first half of the year and then things start to kind of ramp up as we move towards the election in November. But what we’ve seen so far in 2024 has been, really, quite the opposite.

We’ve seen another raging bull market that’s driven by other factors, not just a presidential election year, that have driven the market higher, quicker than a lot of people have anticipated. It’s still to be determined how the rest of this year shakes out.

But I wouldn’t doubt that we continue to stay in this kind of high trending low volatility environment unless something crazy happens like a recession that’s happened back in 2020 or 2008 as we’ve seen before. Things to stay less volatile during this period. And that should be okay for investors in this time.

Jon (03:22):

Okay. Now Alex mentioned something wild happening. Bruce, something I am worried about a little bit is a contested election. I mean, we had a few days before we had a winner last time around in 2020 and what happens if there is not a clear winner to the election?

Bruce Hosler (03:40):

Well, all of us that are old enough, remember the hanging chads in Florida back in the day?

Jon (03:45):

I am old enough to remember that. I was in college, but I remember, yes.

Bruce Hosler (03:50):

The hanging chads. So, presidential elections, they do influence the way people feel about the government, the economy, everything like that. But let’s focus on the fundamentals. We’ve got an AI story that’s going on in the market right now where companies, specifically semiconductors and big tech companies, are investing huge amounts of money into artificial intelligence.

And looking forward to leveraging the profit that will be made from that. I think that distracts from maybe a contested election and the markets, as you see right now so far this year in 2024, they’re reporting great results. Now, if this is contested, we’ll see what happens with the courts and everything like that. And when that happens, we do see some pullbacks in the short term.

In some previous periods, like in 2000, the market pulled back 1.6%. Again, in another period in a contested period later in 2000 it pulled back as low as 4.9%, but a month later it was only down 3%. So, it’s only temporary that those effects take place in the market.

And most of our clients are invested long-term. This is retirement money. So, it doesn’t make any sense to try and get excited about doing gyrations and jumping in and out of the market.

Jon (05:18):

That’s very fair. And again, we’re not partisan on this podcast, we’re not taking political sides, but there are some folks who are unhappy with President Biden, we’ve seen his approval rating down. Does an unhappy country mean the stock market is a bad place to put your money?

Alex Koury (05:32):

You would think that would be the case Jon, but actually it’s quite the opposite. Now let’s go take a look back at history over the last say, we’ll go back to 2001 even. We had a raging bull market, everything was going really well, approval rating for the President in that year in 2001 was 70%. That’s the highest it’s ever been in this period of time.

Jon (05:54):

That was the year of 9/11.

Alex Koury (05:55):

That’s right. And then between 9/11 and October of ‘08, the great financial crisis, we saw a massive drop all the way down to a 7% approval rating back in that period. And then between ‘08 and 2020, we saw a massive run again. So, again, we can see that we want to use this as a contrarian indicator potentially.

So, right now, we’re sitting at a very low approval rating for the President. That doesn’t mean necessarily bad times are going to be ahead. So, let’s just keep our perspective on this that we may want to use this as a contrarian indicator that the market may have more room to go to the upside.

Jon (06:30):

So, we’ve talked about keeping money and cash in the trillions that are on the sidelines right now. Why should investors consider allocating their cash now, as we’re recording this May 16th, six months before the election?

Bruce Hosler (06:42):

Well, that’s a great question. And historically, investors build cash in election years, just like we’re seeing this year, $5 trillion sitting in cash on the sidelines. Historically, the money market funds in non-presidential election years are about half of what they are in presidential election years.

So, let’s say between 1993 and 2023, when we look at the amounts of money, it’s almost twice as much in money market funds during election years as the other years. But the flows in the last presidential election, the money market funds were almost three times as much in the 2020 election.

So, people are kind of nervous, they’re unsure, but that’s not necessarily the way the markets have moved. If you were sitting in cash this year trying to make part of your 5%, and now the markets, the S&P, and the NASDAQ this morning, are up above 11% year to date, you missed out in participating in that. And we don’t want clients and our listeners to do that.

Jon (07:52):

We’ve seen historically the numbers of, if you’ve missed the big jumps in the market, what that can do to a portfolio over time for sure.

So, we’re in an election year and we have an interest rate and hike problem. Most experts believe that Chairman Jerome Powell of the Fed should cut interest rates this year.

But there could be political pressure from either side to cut or not cut because as we’ve mentioned, we’re in an election year. What do you think, Alex, is going to happen and has the Federal Reserve ever cut rates during an election year?

Alex Koury (08:22):

Now, they have cut rates in the past. If we go back even as far as 2020, or as near as 2020, there were two rate cuts in that year and of course that was during COVID. They had to lift the economy as best as they could justifying some rate cuts there.

And we saw that as well in 2008 and a couple times before that, but do they ever raise rates? Sometimes they can do that as well. We don’t see that’s really the environment that we’re forecasting at this point. We’ve seen of course, Jerome Powell and the Federal Reserve continue to push back the rate hike dates.

And this is driven by a strong economy and people are working and they’re spending money, they have money in their pockets, so they are trying to toe the line, keep inflation down, keep everything going in the general direction of upwards for the market. So, we don’t expect anything to happen probably until after the election at this time.

Jon (09:14):

Well, with that in mind Bruce, the market certainly, as you mentioned, had a strong start to the year. Is it possible we’ve gone too high, too fast?

Bruce Hosler (09:22):

It’s possible, but then the question begs: what’s going to cause it to pull back? And if we look at performance in that companies have been making profit, they have been meeting their expectations.

And if we look historically since 1926 in presidential election years, when January is positive, every year finished higher, 11 for 11 elections, finishing up an average of 15.6% for the next 11 months. That’s the history of it.

So, if the year starts positive in January, which it did was up 1.7% in January in 2024, there’s probably a high likelihood that the market’s going to end up and like I said it, it’s already up 11% year to date. So, Alex saying that we could see some volatility during the summer and right before the election, we believe that to be the case.

But we think that there’s a high probability that this finishes the year positive and that the market is a good place for people to have money allocated right now.

Jon (10:28):

Got it. Now with the disclaimer that everybody’s financial situation is different, generally speaking Alex, how are you and the folks at Hosler Wealth Management positioning client portfolios in 2024?

Alex Koury (10:38):

So, we’re still very pro-growth in our portfolios overall for our equity side of the portfolio, we have a nice basket of 30 stocks that we allocate to some of our clients specifically. And then we blend that in with some of our mutual funds and exchange traded funds. But we’re still very constructively pro-growth.

We’re in an environment even though rates are higher, they still lend to provide us opportunities in the growth side, even though everyone continues to argue, we want to be more value oriented, that’s one part of it.

But the other part of it is we just don’t know what’s going to happen. No one knows what’s going to happen. If anyone’s saying they know where the market’s going, they’re probably not telling you the exact truth.

So, we continue to use our buffered ETF strategies to hedge against the potential for downside risk in the market that can save our investors and clients up to 15% of their assets on that side of the portfolio.

So, if the market’s wrong or if we’re wrong and the market goes down, we’re hedging 15% to the downside, but the market continues to go higher, so does the market just as well and so does these portfolios. We are so on that line of being pro-growth, but also having some elements of protection as well.

Jon (11:47):

That’s a really good summary, thank you Alex. Bruce, what other things should retirees consider this year?

Bruce Hosler (11:52):

Well, we want to remind everyone that when you’re creating a retirement income plan, we allocate, depending on when you need income to the allocation you should have in fixed income investments. So, fixed income, mutual funds and that.

And so, if you need income in the next five years, primarily you should be taking that out of a bucket of money that you have allocated and created for fixed income. You’re earning your 5 to 6% interest. And as you cash those in and create your income ladder, your income’s not going up and down even though the market may see a volatility for that. So, we remind you that that’s where you’re taking your income from.

But right now we feel it’s very important with this inflation going on right now, folks, you have to invest in a way that you can keep your portfolio producing inflation adjusted returns so that when you need that income in the future, and it’s going to be higher because of the inflation we’re experiencing, your portfolio has kept up with the inflation that we’re seeing today.

Jon (12:57):

Fair enough. Before we wrap up, gentlemen, anything else you want our listeners to know today?

Alex Koury (13:01):

Just keep it level ahead as always. I know political tensions can arise. We have a very polarized country seemingly so everyone’s on one side or the other. And that’s okay if whatever your beliefs are politically, but just realize that that doesn’t necessarily translate into how the market feels. So, don’t let your political decisions guide how your money decisions are made.

Bruce Hosler (13:22):

And I think that the last thing that we want to add is that asset allocation is important. So, for example, we have not been fans of being invested internationally right now because we feel there’s too much risk there, and we feel like the U.S. is the cleanest dirty shirt in the room, and our clients have been rewarded for that over the last few years.

And so, just like the Magnificent 7 performed well last year and the other 493 stocks did not do so well, you want to be invested where you need to be invested, and you want to avoid places where you may not want to be invested.

And so, that asset allocation, making those investment decisions, we’re guiding our clients in those areas where we want them to be and we feel like they have been rewarded, and we can help avoid the potholes in the road as we guide our clients down the freeway and avoid those potholes.

And so, we’re trying to do that, and we think that everybody should consider that when they consider their investment allocations.

Jon (14:19):

So, my two big takeaways here are, as you just said Bruce, diversification is so important as we’ve preached in almost every podcast we’ve done. But specifically with today’s podcast, there’s a lot of noise.

You’re going to hear a lot of noise over the six months leading up to and through this election, no matter where you sit on the political aisle, don’t get distracted by the noise and don’t freak out when you see these attention-grabbing headlines.

Have a plan, stick to it. And the best way to have a plan is to work with a professional. So, Bruce, if somebody wants to contact you and the team in Hosler Wealth Management, how do they best find you?

Bruce Hosler (14:50):

They can reach us at hoslerwm.com. There’s a place there to select a link and reach out to the offices or if you want to call one of the offices here in Prescott, (928) 778-7666, or in our Scottsdale office where you can reach us here at (480) 994-7342.

Jon (15:11):

Some great perspective on the world and where we sit today. So, appreciate you both. Take care.

Bruce Hosler (15:14):

Thanks Jon.

Alex Koury (15:16):

Thanks Jon.

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Jon (15:17):

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