Election Fever (and Fear) - Emotions vs. math
"Before the election, everyone is anxious. After the election, only half of people are anxious."
@JoshWomack
For many of us investors who have been in the game for some time, it's long been understood that emotion plays a huge role in our investment outcomes. What the industry often attributes to skill boils down more to how we, as investors, tolerate drama.
For some, that drama and source of anxiety comes at times of heightened market volatility, as we see during recessions and bear markets. For others, the drama can arrive like clockwork every four years during major election cycles.
The Emotional Rollercoaster of Elections
It's natural for elections to stir strong emotions. The future of our nation feels at stake, and the media often amplifies these feelings with intense coverage and dire predictions. However, it's important to recognize that these emotions, while valid, can significantly influence our perception of the investment landscape – often in ways that don't align with economic realities.
While it's tempting to believe that election outcomes directly and immediately impact the market, the reality is more complex:
Short-term volatility: Markets may experience short-term fluctuations due to uncertainty, but these are often temporary.
Long-term trends: Over time, markets are driven more by economic fundamentals, corporate earnings, and global events than by which party holds office.
Policy implementation: Even when significant policy changes occur, they often take time to implement and impact the economy.
Political neutrality of markets: Importantly, historical data shows that market outcomes are not significantly different between political parties. The stock market has performed well under both Democratic and Republican administrations, reinforcing the idea that other factors are more influential in driving long-term market performance.
Below is a table of US Stock Market (S&P500) returns for all presidential administrations going back to Ulysses S. Grant. Returns were fairly consistent across administrations, with notable exceptions happening during boom times like the Roaring 20s followed by the Great Depression, the dot.com boom and bust, and the Financial Crisis.
If we consider all 39 presidential 4-year terms in the table, only 9 terms were negative. With the exception of the Hoover administration, which took office at the end of the Roaring 20s and the subsequent crash and Great Depression, most of those negative terms were defined by one or two tough years.
What if we look at markets over time when different political parties are in power, as shown in the table below? When the government is unified, meaning a single party is in control of both Congress and the presidency, returns are strikingly similar. The exception has been when the government was divided with a Democratic president; returns have nearly doubled similar division but with a Republican president. All told, the data does not support dire economic events unfolding.
The Amplifying Effects of Social Media
"The right of giving the truth in evidence, in cases of libels, is all-important to the liberties of the people. Truth is an ingredient in the eternal order of things, in judging of the quality of acts."
Alexander Hamilton - People vs. Croswell, 1804
In recent years, social media has dramatically changed how we consume and interact with political information. Politicians, understanding the intersection of emotions and social media, know that fear sells better than policy discussion. But it goes deeper:
Echo chambers: Social media algorithms often show us content that aligns with our existing views, potentially reinforcing biases and increasing polarization. For instance, many social media websites and email distribution tools know when you are scrolling through your feed and when you stop reading something. It makes a note of that pause and knows what will keep you engaged for longer in the future. We don't do this because we think it's creepy.
Rapid spread of misinformation: False or misleading information can spread quickly on social platforms, making it challenging to discern fact from fiction. With AI, it will only get harder. That article, photo, or viral video about the "wrong candidate" you found so completely outrageous that you shared it with your friends and followers? AI may have played a role. You've just spread the misinformation virus.
Constant engagement: The 24/7 nature of social media (and cable news) can lead to information overload and heightened anxiety about political and economic issues. Those middle-of-the-night doom scrolls are not only bad for one's eyes and sleep patterns, but they are hell on one's mood as well. It's perhaps no surprise that some of the leading advertisements are for gold and, in some cases, pillows (apparently for those losing a lot of sleep over "things').
Navigating the Emotional Waters
When emotionally glued to the algorithms and echo chambers, it often creates a view of the world that, once that spider web of fear and anxiety takes hold, can wreak havoc on one's long-term investing and one's financial plan. Below are a few steps you could look to take if your "stress to equity" ratio feels elevated.
Emotional barriers: When emotions run high, it becomes increasingly difficult for many to internalize rational market analysis. There is a striking similarity of emotions during elections and challenging financial markets. For our investment clients, the barrier may very well be having someone else deal with the portfolio stresses and the occasional "it'll all be ok" conversations (which we welcome). For me, as an advisor, it's about utilizing a well-vetted investment process that we can adhere to. With election fears and markets, it's important to appreciate the data (like above) about what our "guts" are telling us.
Pressure for immediate action: There's often a strong fight or flight urge to "do something" in response to perceived threats or opportunities, even when staying the course might be the best action. For example, you read the charts above and think to yourself, "Yeah, things will probably be ok over the long run," but you can't help but question whether to go to cash or "hedge" your risk in case the "wrong candidate" wins. Fighting that temptation is as important in elections as it is in challenging markets.
Self-Imposed Time Out on Social Media: Aside from an anonymous ("burner") account on Twitter, I haven't been on social media since 2016. It was that year that I "paused" my social accounts, given what I felt was an abundance of toxic information and crazy narratives shared by both strangers and family and friends. I fully canceled my accounts in 2017 and haven't looked back. I rarely miss it. It was a personal choice, and maybe you don't have to fully exit the digital "social" world, but setting a time out until after the election may be a reasonable choice. Perhaps mute the most toxic in your circle, even those that you may agree with. And perhaps just pick up a phone and call your friends and family or meet them for coffee, even the "crazy" ones with political views that may not align with yours. You may find that they are still good humans who are important in your life and only political wing-nut 20% of the time. After all, they, too, are human.
It's tough to tell ourselves that "all will be ok" when it comes to political outcomes. As an advisor, I've borne the effects of others' incredulity at times, especially when folks may get the sense that we're perhaps not seeing things the same way they are. Yet, the data is the data when it comes to historical returns and what most of us have been in this investment game for a while now; looking long-term helps tamp down the near-term anxiety.
Thank you for reading.
Brian Aberle, CFP®
President
Aberle Investment Management
Aberle Investment Management LLC is a registered investment adviser. The information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to consult with a qualified financial adviser or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future returns.