2020 is an Election Year, What Does That Mean for Your Portfolio?

As if investors didn’t have enough to think about, 2020 will be a general election year in the United States. A general election is one in which the country votes for President as well as congressional representatives and senators. Historically, general election years have been highlighted by volatility in the stock market.

It makes sense. Every two years, the balance of power in the United States Congress can change. However, every four years, the executive branch is up for election as well. Although the United States is frequently referred to as a center-right country, the nation can move from more conservative (right) to more progressive (left). The party that controls the White House and, more importantly, Congress can have a significant impact on the monetary policy of the country.

Volatility does not mean poor performance

General election years have no correlation with poor market performance. In fact, a case could be made that general election years have correlated with positive market performance. Looking at the performance of the S&P 500 Index for each general election year since 1928, the market has only had a negative return three times (13%). However, the historical average annual return for the S&P 500 Index since 1957 (the year in which the index adopted 500 stocks) is 7.96%. By this metric, the index has performed below average in nine out of the 23 years (39%).

S&P 500 Stock Market  Performance During General Election Years
Year	Return
1928	43.6%
1932	-8.2%
1936	33.9%
1940	-9.8%
1944	19.7%
1948	5.5%
1952	18.4%
1956	6.6%
1960	0.50%
1964	16.5%
1968`	11.1%
1972	19.0%
1976	23.8%
1980	32.4%
1984	6.3%
1988	16.8%
1992	7.6%
1996	23.0%
2000	-9.1%
2004	10.9%
2008	-37.0%
2012	16.0%
2016	11.9%

 

But let’s look at another metric. The election of 1928 occurred before the infamous stock market crash of 1929. This ushered in the Great Depression. Since 1929, the United States has had 14 recessions. Of these 14 recessions, only five have occurred during a general election year. And none of those years saw stock market performance that exceeded the S&P 500 average annual return.

S&P 500 Stock Market  Performance for General Election Years During a Recession
Year	Return
1932	-8.2%
1948	5.5%
1960	0.5%
2000	-9.1%
2008	-37.0%

 

Why is this significant? Because most economists believe that the United States is heading toward a recession. And it’s possible that the economy could tip into recession during 2020. Based on the chart above, that would spell bad news for the stock market.

The stock market picks winners and losers

While there is no distinct correlation between overall market performance and election years, investors should pay attention to specific sectors. A good example in recent elections is the health care sector. In 2016, health care stocks had one of their worst years ever. One reason for this performance was uncertainty surrounding the election. Health care, and specifically the direction of universal care, was a central theme of the election.

One candidate wanted to continue, and expand upon, the policies of the Obama administration. The other candidate pledged to repeal all that had been put in place over the prior eight years. It’s no wonder that health care stocks struggled to find a clear direction.

In contrast, in 2018 (although not a general election year), health care stocks rallied as polls suggested that the Democratic Party would win back control of the House of Representatives. This was seen as being favorable for health care stocks. The same was true in the general election year of 2008. Health care stocks surged once the markets were confident in the election of President Barack Obama. The centerpiece of President Obama’s campaign was an overhaul of the nation’s health care system.

What does the year 2020 have in store for investors?

The market will always be concerned about macroeconomic issues. That will keep the trade war between the United States and China front and center. If a deal is struck prior to or during 2020, the market should see a modest surge as industries that have been paralyzed by uncertainty will now have clarity. On the other hand, if the trade war continues certain sectors such as industrials may have a difficult time. According to FactSet data from September 20, 2019, all 11 market sectors are projected to have positive earnings growth (YoY) in 2020. Energy stocks are projected to do the best with the sector having a forecasted EPS growth of 30.3%. Utilities are expected to have the lowest growth forecast at just 5.4%. Does this mean anything conclusive? Not necessarily. Remember, the market will choose winners and losers.

What steps should investors take to prepare their portfolio for 2020?

As with most events, the most important thing for investors to do is not panic. Based on the historical trends, investors should pay more attention to the macroeconomic issues that could push the economy into a recession. If the market stays out of a recession, historical trends suggest that the market may do well, possibly even exceeding the S&P 500 Index historical average.

However, this doesn’t mean you shouldn’t do anything. As 2019 nears its end, you can take a look at your portfolio and your exposure to particular sectors. If your portfolio is heavily weighted in a sector that could be affected by a change in government or monetary policy, it may be best to decrease your exposure. Likewise, now may be a time to prudently buy some defensive sectors that tend to do well regardless of what is happening in the broader economy.

A final thought. You should absolutely not try to time the market. Institutional investors base their forecasts on the expected outcome. It’s called baking in the results. There will be a lot of news in 2020. But every time you see a headline you should remember that the market has already priced that into what you see in the broader market or with a particular stock. Don’t fight the trends.