Markets and Three-Year-Olds with Much in Common

People often wonder why the stock market tends to go up after an election. If you look at it historically it doesn’t even seem to matter which party wins. According to Bloomberg research, going back 60 years, during the 12-month period before a mid-term election the S&P 500 averages a 1% loss. In the 12 months following the mid-terms the same index averages a 16.3% gain.* Presidents and political parties like to take credit for stock market movements, and of course there are many factors to consider, but there seems to be a general trend that the markets do not like elections and are glad when they are over. I think a recent Disneyland experience with a grandchild might help explain this phenomenon.

We had with us a three-year-old grandson who was very excited because he was just barely tall enough to go on all the big kid rides. This is also a great moment for parents who are finally able to experience the entire park as a family. As this young child approached a very popular ride we could see in his eyes and hear in his voice, his underlying fear for what the experience might entail. His emotions were running high as the ominous music and scary visual effects led him to question his brave decision to ride. The scary comments of older children in the group didn’t help either. We did our best to reassure him that this was all make-believe with no real risk, but we could not overcome the basic human fear that seems to always accompany uncertainty. Despite our efforts, the fear of the unknown overcame him as he clung tightly to his father with a look of horror on his face throughout the entire experience, and we have the photo to prove it. Yet, the moment the ride ended you would have thought he just conquered Mount Everest as he boasted to all around him of his bravery as well as his desire to ride it again. Clarity had replaced uncertainty and with it, his fear was gone.

Think of investors and elections like a three-year-old approaching a scary amusement park ride for the first time. They are excited for the experience, but terrified of the uncertain outcome. Uncertainty often leads to inaction and inaction lowers market returns. It’s difficult to know how to invest, or what to fear, when an elections’ outcome is uncertain. Once the results are known, regardless of what they are, investors feel better about making decisions for their investable dollars. So, if history holds true, the next 12 months should be good for the stock market. Of course, historic averages are derived from a variety of past outcomes and no one can know for sure where the coming year will fall on the graph. Here’s to hoping it makes us all as happy as my grandson was the next 3 times he went on that ride.

Dan Wyson, CFP® is author of “The Gold Egg," and “21 Financial Myths” and owner of Wyson Financial/Wealth Management 375 E. Riverside Dr. St. George, UT 84790 - 435-986-9525 – Securities and Advisory services offered through Commonwealth Financial Network, member FINRA/SIPC, a registered investment advisor *Bloomberg from Oct 31, 1961.