Investors Are Reducing Portfolio Risk Ahead of the Election

America is just over seven weeks away from Election Day, and investors are starting to get as jittery as each parties’ supporters. In response to a recent survey conducted by global asset management group Janus Henderson, 6 in 10 investors say they plan to scale back portfolio risk until the election is determined.

But is that an excellent move? Despite recent volatility, the market continues to point out signs of strength, and for investors who’re shying away from stocks, shifting to conservative strategies could come at a price.

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Election yr market performance

A typical misconception about market performance during election years is that political unpredictability trickles into stocks and results in poor returns.

Nevertheless, data from T. Rowe Price shows that the S&P 500 performs only marginally higher in non-election years. From Dec. 31, 1927, to Dec. 31, 2023, the market produced a median annual return of 11.6% in non-election years. For presidential election years, the common annual return was 11%, with the additional advantage of S&P 500 returns being “generally higher within the runup to a presidential election than in non‑election years.”

For this reason, the 60% of investors who say they’re reducing risk exposure ahead of the 2024 election may very well be making a critical mistake. But allowing emotions to dictate investment decisions comes as no surprise to David Lundgren, chief market strategist and portfolio manager at Little Harbor Advisors.

“Within the minds of investors, the entire world is riding on this election. Whether that is true or not, it’s what people consider,” he says. “And if that is the case, we all know needless to say that investors do not like uncertainty — and they have an inclination to go for the hills after they’re scared.”

That retreat has already began. In response to Reuters, throughout the second week of August, investors withdrew $8.92 billion from U.S. equity funds in what was the most important weekly sell-off since June 12. At the identical time, money markets and government bond funds saw inflows of $16.1 billion and $3.35 billion, respectively.

Lundgren says he believes that if stocks do start to tug back in anticipation of a presidential election, investors should make the most of those opportunities — if the market is healthy before a sell-off begins, that’s.

Since emerging from the last bear market in December 2022, the S&P 500 has gained nearly 44%. Probably the most significant pullback during that run occurred in mid-July, when the index dropped by 8.49% — but all of those losses were recovered by the tip of August. Those quick bounce-backs ought to be expected in healthy markets like the present one, based on Lundgren.

“Without delay, we are able to actually say we’re not in a bear market,” he says. “While you get a pullback in a bull market, that weakness encourages buyers to are available, and also you’re back to latest highs again.”

Conflating economics and stocks

One other common misconception about market performance is that it’s intrinsically tied to the economy. In response to the Janus Henderson survey, 55% of investors are concerned in regards to the risk of recession.

“Timing the market using economic data is totally a idiot’s errand. The typical investor absolutely and erroneously conflates economic data with market health,” Lundgren says. “We buy and sell stocks, not GDP.”

Although concerns in regards to the economy slipping right into a recession are widespread, he says that the market, going back to 1950, hits its highest levels on average seven months before a recession even begins. It typically hits its lowest point eight months before the recession ends.

Most analysts use two consecutive quarters of economic decline — as measured by gross domestic product, or GDP — because the definition of a recession. Data from the U.S. Bureau of Economic Evaluation hasn’t shown GDP contraction because the second quarter of 2022. Since then, the U.S. economy has seen eight consecutive quarters of GDP expansion.

Comparing the state of the economy and the health of the stock market is akin to comparing apples and oranges, however it’s something economists do since the market leads the economy.

“Economists ridicule the S&P 500 for its volatility, but in addition they include it within the index of leading economic indicators because they know that it turns down before recessions start and bottoms before the recession is over,” he says. “Investors should not be specializing in that, because by the point we all know we’re in a recession, over half of those [market] losses have already happened.”

You possibly can’t time the market

With historical data indicating that the market performs nearly as well during election years because it does in non-election years, it’s unwise for investors to be shying away from stocks in favor of money positions or lower-risk assets like bonds and CDs, that are more likely to begin offering lower yields once the Federal Reserve begins cutting rates of interest this month.

The Fed’s rate-cutting policy could function an impetus for the market to complete the yr on a robust note, and market timing is, statistically, a mistake. If investors continuously change their behavior to try and avoid pullbacks, corrections or bear markets, they’re more likely to miss out on subsequent gains.

In response to Hartford Funds, investors who missed the market’s 10 best days over the past 30 years would have seen their gains reduced by half. The outcomes are worse for many who missed one of the best 30 days of stock performances, with returns reduced by an astonishing 83%.

As a substitute, investors ought to be using perceived market weakness as a buying opportunity.

“You actually should not be attempting to get out of the best way of a 20% decline,” Lundgren says. “As a substitute, try to be using that as a likelihood to purchase high-quality corporations which can be on sale.”

Hartford Funds’ findings suggest that those that rode out rough patches available in the market benefitted essentially the most in comparison with those that tried to time the market. From 1994 to 2023, the S&P 500 would have turned an initial investment of $10,000 into $181,763 for many who sat tight. For individuals who missed the 30 best days during that period, that growth would’ve been limited to $30,889.

“You are just higher off not timing the market,” Lundgren says. “Pick a technique that works over time and matches your horizon.”

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