Midterm Election Waves Shouldn’t Unnerve an Investor
One of the analogies I’ve proffered for years in client meetings is the idea of a ship’s ‘pilot’ or ‘captain’ and his navigation of a ship’s journey. In the last month, I’ve found myself referring to it in almost every interaction. I like it as I think it provides the best visual I know.
If I haven’t used it with you yet, here it is (with my apologies to seafaring folk who have a more detailed grasp of the terms ‘skipper,’ ‘commander,’ ‘pilot,’ etc.): A ship’s captain has the objective of navigating the vessel to its destination. The captain navigates by relying on knowledge, experience, instrumentation, and when at the helm, keeping his eyes fixed on a focal point. For us non-boat people, whether it is your friend with a ski boat, your grandfather operating a fishing boat, or cruise shipmaster, the eyes are on the horizon.
What a ship’s captain does not do is look down over the side of the boat and steer it according to every wave lapping up against the sides. If someone tries to do that, he or she will inevitably throw up over the side of the boat. Have you been there? Can you imagine trying to steer a ship to a destination hundreds of miles away by focusing on every wave coming to the side of the boat?
So, you are your ship’s captain; you have a plan to reach a financial destination, and you are using knowledge, experience, and instrumentation to set priorities and take action. Every journey on the water has waves. Waves are to water like wet is to water. You can’t separate the two. Experience tells you every financial journey has waves.
Much like being on the water, the folks that focus on every financial wave lapping up against their plan will inevitably get sick; and, it can get messy. So, you must act like a ship’s captain and focus on the horizon, ignoring the small waves along the way.
The past month of October has shown us many waves, but many months (especially October) have shown these, yet people still reach their financial goals.
Allow me to touch on a set of waves related to midterm elections. I’ll identify them and ask you to not focus on them and the tie to your financial journey.
Wave number 1: The president’s party typically loses seats in Congress.
Over the past 21 midterm elections, the president’s party has lost an average of 30 seats in the House of Representatives and an average of four seats in the Senate.1
This change in the majority is the case because the opposition has the more motivated group of voters (human nature). Since losing seats is common, it is usually priced into the markets early in the year; however, there is some uncertainty with the extent of a power shift.
Wave number 2: Market returns are muted until later in the midterm years.
When you compare midterm election years to all other years since 1931, the months leading up to the election are starkly muted in returns. The months following the election are also starkly different in comparison, only in a different direction; they rise much more sharply. Once winners are declared, and certainty appears, markets respond positively in most years.2
Wave number 3: Volatility is elevated.
Volatility has historically increased as the midterm elections approach, with S&P 500 realized volatility an average of 1.8% points higher in the three months leading up to November since 1970.3 So, returns move are lower on average over the months, but the daily movement is more active during that time. An investor gets all the bumps at the confluence of two rivers without going anywhere.
Wave number 4: Markets usually bounce back strongly after elections.
After muted returns during a midterm election year and higher volatility, markets rebound. Since 1950, the average one-year return following a midterm election is 15%. In all other years, it is 6.8%.4
But, if you look out towards the horizon and not at the waves, what is the point?
This is not to say that elections don’t matter. They certainly do for many reasons, but what you shouldn’t do is change your investment philosophy because of them. While my above comments are all about averages, and the market may very well act different this year, I would suggest these are waves that don’t have to doom your financial ship, too.
You are not on a month-long journey; you are on a years or decades-long journey. When you stare at the month, it is like staring at the waves lapping over the side of your boat. That doesn’t bode well for your health, physical or financial.
1 The America Presidency Project 2 Capital Group, Standard and Poor’s, as of 8/31/18. 3 JP Morgan Asset Management, September 2018 4 Bloomberg
Author: David Jeter, CFP® | Partner and Financial Advisor | Allegheny Financial Group | November 2018
Allegheny Financial Group is a Registered Investment Advisor. Securities offered through Allegheny Investments, LTD, a registered Broker/Dealer. Member FINRA/SIPC.
