Amid Election Uncertainty, Remember to Focus on the Long Term

The contentious U.S. presidential election is over. Given the roughly even split among voters, it’s understandable that a great deal of readers are disappointed—and others elated—at the results. When it comes to investing, however, these emotions must be set aside. History makes it clear that the stock market has no political preference.

My message to investors this week, and in future weeks/months as the transition of power takes place, is clear: stay focused on your objectives and remember what it takes to achieve them. And that is, an asset allocation that’s aligned with your long-term goals, income needs, risk tolerance, and one that’s driven by economic fundamentals and corporate earnings. Short-term political outcomes should be walled off from these considerations.

This is not to say that the election result does not matter. It does, as the president influences and sometimes establishes economic policies. But these changes do not take place immediately—there is plenty of time to assess how campaign proposals take shape as actual policy, and/or whether many of the ideas floated on the campaign trail get watered down substantially or scrapped altogether. Remember, too, that economic cycles do not fit neatly into four-year boxes depending on what party is in power.

History reminds us to keep our cool. Since the inception of a version of the S&P 500 in the 1920’s[1], there have been 24 U.S. presidential elections. In 20 of them, the S&P 500 Index registered positive total returns. In the four instances when the stock market fell, the U.S. economy was in the Great Depression, the early days of World War II, the 2000 tech bubble, and the 2008 Global Financial Crisis. Today, we have 4% unemployment, roughly 2.5% inflation, 2+% GDP growth, and solid corporate earnings growth (see below). This is the data that matters.(1)

Nevertheless, in the 30+ years I’ve been an investment manager, there has always been investor sentiment that if candidate ____ wins the election, it will be terrible for the stock market. But a look at past election year returns—as well as longer-term returns for U.S. stocks—demonstrates that such an outcome has never materialized. In the cases where we have seen post-election downturns, it has been tied to broader economic factors—not the election or re-election of a president.

The chart below drives this point home. If a person invested money in the stock market only when their preferred political party was in the White House, it would have meant severely reducing total return over time. This is true of both Democrats and Republicans. Investing for the long-term—regardless of who was president—clearly delivered the best result.  

If investors are looking for somewhere to divert their attention in a noisy political climate, look no further than U.S. corporate earnings. The news cycle has essentially buried any mention of the stock market’s most critical driver, in my view. There are plenty of reasons to be optimistic.

Through November 1, we have seen Q3 results from 350 S&P 500 index members, or 70% of the index’s total membership. Total earnings for these 350 companies are +8.8% higher than the same period last year on +5.7% higher revenues. 74.9% of these reporting companies beat their earnings per share (EPS) estimates and 60.6% beat revenue estimates. These are solid results.

If we look at earnings and revenue growth rates for these 350 companies compared to previous periods, we find that both are solidly above average.

In terms of ‘beats percentages,’ we also see earnings and revenue well within historical averages. 

Finally, if we combined current results with Zack’s estimates for the 150 companies yet to report, we find that total earnings growth for the S&P 500 index could be +6.8% year-over-year on +5.4% higher revenues. Again, these are nicely positive results, and ones that investors should focus on more than the election.

Bottom Line for Investors

Over time, the stock market responds more to long-term earnings and economic growth trends, not to changes in political leadership. The emotional gravity of an election—and this election in particular—may make it appear as though the outcome will make or break the nation. But I believe this mindset puts far too much emphasis on political figures and policies, and far too little emphasis on the real engines of the U.S. economy – corporate earnings, small business growth, investment, the consumer, and innovation. Politicians come and go, but the desire to grow, innovate, and pursue profit remains a constant. 

1 The S&P 500 Index in its current form was created in 1957. However, as early as 1923, the Standard Statistics Company, which later became Standard & Poor's in 1941, created its first stock market index, which tracked the stocks of 233 US companies on a weekly basis. Three years later, the company developed a 90-stock index that was calculated daily.

2 Charles Schwab. 2023.

DISCLOSURE

Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.

Zacks Investment Management, Inc. is a wholly-owned subsidiary of Zacks Investment Research. Zacks Investment Management is an independent Registered Investment Advisory firm and acts as an investment manager for individuals and institutions. Zacks Investment Research is a provider of earnings data and other financial data to institutions and to individuals.

This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. Do not act or rely upon the information and advice given in this publication without seeking the services of competent and professional legal, tax, or accounting counsel. Publication and distribution of this article is not intended to create, and the information contained herein does not constitute, an attorney-client relationship. No recommendation or advice is being given as to whether any investment or strategy is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole.

Any projections, targets, or estimates in this report are forward looking statements and are based on the firm’s research, analysis, and assumptions. Due to rapidly changing market conditions and the complexity of investment decisions, supplemental information and other sources may be required to make informed investment decisions based on your individual investment objectives and suitability specifications. All expressions of opinions are subject to change without notice. Clients should seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed in this presentation.

Certain economic and market information contained herein has been obtained from published sources prepared by other parties.  Zacks Investment Management does not assume any responsibility for the accuracy or completeness of such information. Further, no third party has assumed responsibility for independently verifying the information contained herein and accordingly no such persons make any representations with respect to the accuracy, completeness or reasonableness of the information provided herein. Unless otherwise indicated, market analysis and conclusions are based upon opinions or assumptions that Zacks Investment Management considers to be reasonable.

Any investment inherently involves a high degree of risk, beyond any specific risks discussed herein.

It is not possible to invest directly in an index.  Investors pursuing a strategy similar to an index may experience higher or lower returns, which will be reduced by fees and expenses.

The S&P 500 Index is a well-known, unmanaged index of the prices of 500 large-company common stocks, mainly blue-chip stocks, selected by Standard & Poor’s. The S&P 500 Index assumes reinvestment of dividends but does not reflect advisory fees. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor. An investor cannot invest directly in an index.