By now, advisors may be hearing from clients wanting to trade and rebalance their portfolios before the Presidential election. Your clients may believe presidential election cycle theories or seasonal analysis myths and want to trade and rebalance based on misinformation.
As an advisor, you believe in the fundamentals, but public sentiment, current economic conditions, and politics can cause “headline risk” for many clients. What do you say to your over-reacting clients?
Helping your clients understand how a presidential election influences the stock market requires looking at past historical data and linking the S&P 500 Index returns and the U.S. Presidential election outcomes. Over the last 60 years (1956 to 2016), there were16 elections, and the S&P had positive returns 14 of these years; the return was 9.8%. Analyzing this historical information further, the average return was higher during an election year when a Republican was elected, an above-average return of 11.8%. Simultaneously, the index return was only 7.2%, leading to a Democrat winning the race.
Even if clients think that the political party that wins the election drives the stock market’s performance, we know this is not exactly true. What has a significant bearing on the election outcome is the stock market’s performance before the election- the year before and at least six months prior.
So what about trading and rebalancing? Stick to the fundamentals.
In your decision making and explanation to clients, remind them that advancing technology alerts when trading and rebalancing based on macroeconomic events makes more sense than short-term cycles. Interest rates, global economic conditions, and economic expansion and contraction outweigh any President’s agenda.
History has shown there may be statistical evidence when it comes to stock market performance, but past performance does not indicate future results. When trading and rebalancing, the economic significance is what matters.
Helping your clients be aware of their biases and not time the markets ahead of the upcoming election is critical. Remember that AdvisorPeak is here to help you keep your client’s portfolios on track, regardless of who wins the 2020 election. Schedule a demo to find out how our trading and rebalancing software is the most powerful and intuitive way to help you manage your client portfolios.