November 2016 Update – Presidential Election Special



tump-clintonI was too busy packing for my post-election move to Canada to get out an update in October, but no worries – the recovery continues to trundle along and there was nothing of particular note in the economic news last month. Mostly more of the same, with a slight tilt towards an acceleration in the recovery, as data showed GDP growing a a faster pace than it has been and signs that inflation may be picking up.

I know that many Thrift Savings Plan investors are very nervous about the presidential election and its potential impacts on their nest eggs, particularly given the string of down days we have had over the last week and a half. So today’s update is all about the election. Don’t worry, this is a strictly non-partisan webpage and there won’t be any political views. Please don’t mistake anything I write below as favoring one candidate over the other.

Today I will cover: (1) what is causing that losing streak, (2) how the markets typically react to elections, (3) whether the stock market predicts election results, and (4) what I think is going to happen over the next week and through the end of the year.

Longest Losing Streak since 2008

Everyone has been so distracted by politics that almost nobody has noticed the S&P 500 has fallen eight days in a row. That’s the longest streak since the Financial Crisis. If we hit nine down days in a row that will be the longest losing streak since 1980.

It all sounds very dramatic, but the fact is that it has been a very mild decline, falling just 2.9% in that period.

So what caused the drop? See number 1 in the section below.

Elections Impacts on the Stock Market Historically (the good old days)

cinton-trump-good-old-daysTake it with a grain of salt if someone marks up old stock market charts to show when elections occurred and tries to draw conclusions. Remember that the market is continuously evolving and looks nothing like it did 25 years ago, much less 100 years ago. And remember that there were a lot of other things going on impacting the market besides the election (most notably the business cycle, which really couldn’t care less who is in the White House). It is also very easy to cherry pick data so you get the result you want – for example I can convince you that either Republican presidents or Democrat presidents are better for the stock market by just switching which index I’m using or using a slightly different date range.

But for what it is worth, here are some nuggets from history:

(1) The number one lesson is that the market responds much better to elections where the outcome is predictable. That makes sense, because if there is one thing the market hates, it is uncertainty. That’s why the market was so steady, trading in a tight range for almost three months as Clinton started to look like a sure thing. But it has been sputtering since Director Comey sent his letter to Congress and Trump came back a bit in the polls. Uncertainty is a self correcting issue, but not until November 8.

(2) There is more uncertainty this cycle because the incumbent isn’t running. Since 1928, the S&P 500 has dropped an average of 2.8% in the final year of a president’s second term. Compare that to the average return of 12.6% in years in which the incumbent is running for reelection.

(3) In years in which the incumbent can’t run, the market does markedly better if the incumbent’s party wins the election than if the incumbent’s party loses.

(4) The market rises an average of 6% in the first year of a presidential term, a little lower than the 7.5% average for all years. The market typically does better in the second half of a president’s four year term than the first, with the last seven months of the president’s last year being positive in all but two election years since 1952.

(5) When you look at what the most successful  combination of who is president and who controls congress are, the rankings from best to worst are as follows:

  1. Democrat President/Republican Congress
  2. Either party controls both White House and Congress
  3. Either party in White House/Split Congress
  4. Republican President/Democrat Congress

(6) And finally, under which party has the stock market done better? There are a lot of different studies out there, most of them coming out with a statistically insignificant advantage to the market under Democrats when corrected for market volatility. And that advantage is so small it is meaningless compared to other normal market return variations. For every study which shows that one party is better than the other, you can change the date range slightly or measure a different index and come out with the opposite result.

Does the market predict the results of the election?

Historically, if the stock market is up in the three months leading up to the election, the incumbent party wins, whereas stock market losses over those three months tend to predict the opposition party will win. In the 22 presidential elections since 1928, 14 were preceded by gains in the three months prior. In 12 of those 14 elections, the incumbent (or the incumbent party) won the White House. In seven of eight elections preceded by three months of stock market losses, the incumbent party lost. That means the S&P 500 has an 86.4% success rate in forecasting the election.

This is an interesting fact, but the folks who crunch numbers for a living will tell you that this isn’t a large enough sample to be at all conclusive and it obviously ignores all of the other factors which go into the stock market and presidential elections.

But just for fun, what does this indicator mean for the 2016 election? A few trading days out from the election, that measure is too close to call. Over the past three months the S&P 500 is down 0.73%. It can change that much in a few minutes, so unless something changes in the next few days, the market won’t be making a strong call one way or the other on this one.

The Crystal Ball

There are three possible outcomes: clear Clinton win, close call either way, and clear Trump win.

Clinton Win: My prediction is that Clinton wins with a large enough margin in the Electoral College that there is no dispute and nobody calls for statewide recounts in the presidential race, followed by Trump conceding more or less gracefully. If you go back just a few months, you will see that I was wrong about which way the BREXIT vote would go, and it is entirely possible that I will be just as wrong here as well.

I don’t think the election is as close as the media wants you to think it is. CNN will make over a billion dollars in ad revenue on its election coverage over the past 18 months. They don’t keep people tuned in by saying it is all-but-over if you look at the electoral college numbers. They get you to watch commercials by putting up tickers showing the results of some poll which doesn’t really tell us anything about the actual election.

The impact of a clear Clinton win would be the market breathing a sigh of relief to the upside, and I think we would see a few percentage point gains between now and the end of the year.

A Hanging Chad: The next most likely alternative is a close election, with either Clinton or Trump winning. Both parties have armies of lawyers standing by in each of the swing states, so if they are separated by just a few electoral votes I don’t think we will see either one concede on November 8. That would be fantastically stressful for the stock market (see above where we talked about how the market hates uncertainty), and I would expect to see the market move lower until the results become clear, at which point we will see a recovery. If I thought this was likely, I would move to the G Fund until the drop and then buy the C Fund back at a lower price.

Trump Wins: Finally, and least likely in my estimation, is a clear Trump victory. The Republicans just start with too deep a hole in the electoral college to make mistakes, and Trump doesn’t appeal to a broad enough swath of Americans to overcome that disadvantage. But just as with BREXIT, I could be wrong, and Trump could become the President-elect on November 8.

If that occurs, I believe we would see a fairly sharp market correction as all the experts who were quite certain Clinton would win see themselves caught on the opposite side of the bet. I would expect the correction to be between five and ten percent. And that would be a very good buying opportunity, because (just as with BREXIT) it would quickly become apparent that the world would not end and that the President doesn’t actually have much control over the economy. So I expect the market would recover relatively quickly and the market would end the year about where we are now or perhaps just a bit lower. As with the Hanging Chad possibility, if I thought this were likely I would move to the G Fund and buy back in at a lower price after the drop.

As I mentioned before, this is a strictly non-partisan blog and the predictions I made aren’t based on any political views I hold, just what I think will happen based on what I have read. So please don’t unsubscribe if I predicted the team you are pulling for might lose.

So what does that all mean for me?

As with the vast majority of “THE MOST IMPORTANT THING EVERs”, I don’t think the election will impact the economy over the short or medium term. So I am staying exactly where I am and not changing my allocation. The next week will almost certainly be volatile, but that only affects me if I sit and stare at CNBC all day. Over the long term, I believe this is just going to be a little flat spot on chart which otherwise points up at a very nice angle.

5-year-s-and-p-500-chartThe Next Update

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47 thoughts on “November 2016 Update – Presidential Election Special”

  1. So Paul is the recommendation to just stay the course with our current contributions? I have seen some users make the recommendation to move to G funds but watching your posts over the last couple of years you have never recommended this. Just curious as to your and others thoughts.

    1. Seems like in two of the three scenarios moving to the G fund is the safe bet, and in the third scenario, even if you chose that one and stayed the course, any gains would be minimal over the short term. So yeah, I’m going to move to G for the next week and see what happens.

  2. I hope you financial outlook is not as bad as your political assessment. Trump will have a landslide win. Market drops for a week then all time highs with tax breaks.

    Unfollowing now!

    1. I find it perplexing that someone would read an article like this and turn it into a political debate. Despite numerous disclaimers stating that this is not a partisan website and that the analysis here is based purely on historical facts, well researched assumptions, and statistics for the purposes of informing our TSP decision making free of charge. If you are in disagreement over the stated facts, assumptions, or statistics, make an argument for why you believe that to be the case, not just some vapid declaration of your disagreement and your decision to unfollow the advice given here, because there are others here who are more concerned with their retirement than the perceived offense to your political sensitivities. Keep up the good work TS Paul.

  3. Christine, it’s all about managing the risk. If there isn’t much of an apparent risk to the downside, most market optimists (or realists?) will stay mostly in the C, S, or I funds, depending on their assets allocations of course. I see it as being likely that Clinton will win and the market will react favorably, at least to a moderate degree. The more interesting aspect to me is how the market responds to a potential rate hike in December.

  4. Thank you! I have been watching the market drop and waiting for your input to ease my mind in my decision to stay the course and not switch to the G fund. This helps tremendously 🙂

  5. If this is a non-partisan blog, why are you even making predictions that Clinton will win the election? Why not just list the three likely outcomes: Clinton wins, close election, Trump wins followed by what you think the market will do? Is there such a thing as non-partisan this election? If so, I would appreciate you leaving your theory of who will win the election out of this blog.

    1. It would be partisan if he declared who he supported. Supporting a candidate is not the same as predicting the winner based on news and context. Being realistic isn’t partisan.

    2. If you actually read his post, he clearly makes a point why he has to make a prediction. He stated that if he thought the election would be close or a Trump win, then he would switch to the G fund temporarily and buy back the C fund low. Since he believes Clinton will win, he will keep his money in the current allocation.

    3. He’s giving his opinion of who will win the election because his goal is to inform us of what he thinks is the most profitable investment in TSP. And he thinks Clinton will win, which means that he thinks it’s best that we keep our allocations as they are. If he didn’t mention who he thinks will win, then he would be doing his subscribers a disservice by not providing his advice of how to invest our money.

    4. Would you really want him to tell you the three possibilities and then not take a stab at which is most likely? This blog entry is about predicting the stock market as it directly relates to the election of a particular candidate. So naturally, a prediction of the stock market in this situation is a prediction of the election of a candidate.

    5. Jeff you are correct. I hear Canada is cold. I posted but apparently he did like my similar comment as well. Like actors, shut up and act. Leave politics to people that actually graduated from high school.

      1. Which isn’t you? The dude was 100% correct and you were 100% wrong. It’s sad that you’re too pompous and elite to see the facts that were in front of your face these past few months. I feel bad for elitists like you.

    6. Stating his opinion that Hillary will win is simply acknowledging factual data. She is favored to win the election and that is a fact.

      The author was simply aligning his opinion with the current political forecasts. Nowhere in the blog does he indicate that he wants Hillary to win, only his opinion that she will likely win.

      It’s interesting to me that your primary takeaway from this blog post was the issue of political neutralality when there is so much good information.

          1. Really? This is the type a reply they can be expected on this website? So, what is the prediction of the market when the FBI prosecute Hillary Clinton? Because I read that is highly likely to but no where here do I see that prediction?

            I am on following now too!

          2. Since Jeff is sensitive, I would just add that if Trum p wins, the market will tank(as reported by a polling source) and America gets the latter of the two gifts the Greeks left us. You “Veep” watchers, of whom I hope Jeff is, will get this homage. As always Paul, thank you for your sanguine assessment and advice for us feds. Keep up the good work.

    7. It’s reasonable to acknowledge that those three outcomes aren’t equally likely based on the publically available poll data. Polling aggregators like 538 and Real Clear Politics agree that a Clinton win is the more probable outcome of the election. If you disagree strongly enough to put your money where your mouth is, then get into the G fund now to take advantage of the November 9 buying opportunity in stocks.

  6. I can see your point, Jeff, but I think the reason a prediction was made was because he was letting us know what he was doing, as he always does, and that was sticking with the current allocation. Since this choice was based on the Clinton win, it probably made sense to include that prediction. You’re right, he could have just given advice based on the three scenarios and not told us what his plan was, but it would not have been in keeping with his usual mode of telling us what he was doing personally.

    1. Thank you Jeff for making my day… You took this helpful post and somehow found its words to be an attack on your political beliefs… That is very impressive. I wonder who you are voting for? One of you two is letting emotions and political bias affect your decisions, and it isn’t the author of this article.

      Learn to read with an open mind.

      Sorry it’s fun to troll trolls…

  7. Thanks for your honest opinion. The market has already shown that the higher the chance trump wins the worse most investors believe the result will be. Hence the immediate drop in the market after Comey made his announcement. this is not a partisan issue, simply the facts that most investors view that a Trump presidency is worse for the market.

  8. Moving to G for a short term. This guy blew it on Brexit. Here is my prediction…the market tanks because of the hanging Chad scenario whereas neither candidate achieves the necessesary electoral votes pushing the result to the house of Representatives for the first time. Buying back in once the market sees certainty.

  9. The way I read it, Paul is including his prediction of Clinton winning (which he qualifies by acknowledging he could be wrong, just like he was wrong about Brexit) as further explanation for his decision to keep his allocations as they are. He makes it clear he is not endorsing anyone or saying he wants Clinton to win. If he thought either of the other two scenarios were more likely, I think he would have expressed it too. Some us have a much lower risk-tolerance and want to play it extra-safe, so I for one appreciate his “prediction” (taken with a grain of salt, as he says) in making my own decision as to whether stay put or move all into the G fund, especially because I am so close to retirement. In the end, this whole blog is based on his opinion anyway, and everyone should do what they think is best for them.

  10. Noun: Democrat; Adjective: Democratic.

    I don’t think there is anything “partisan” about making a prediction and I appreciate your views on this matter.

  11. So…..are you a long term investor or have do you have a proven record of successfully timing the market? Elections, Brexit and other political events will effect the market but to what degree and time frame?

    If you have a successful record of timing the market based on short term events then you are extremely talented or have been very lucky. I have neither talent or luck to I will stay the course for long term investing and reap the benefits of that strategy.

    Paul…thanks for offering your insight….I appreciate your efforts.

  12. Paul – Hope you ignore the partisan rhetoric in here. Apparently some commenters missed your disclaimer line that stated “Please don’t mistake anything I write below as favoring one candidate over the other.”

    Over the past few years, I’ve given a lot of thought to my long-term TSP strategy. I had already pretty much committed myself to staying put in the C and S funds long term regardless of short-term market volatility. Like many others investors, my commitment was tested with Brexit. But I stayed in stocks and got rewarded after the dust settled. I have not reallocated my TSP since July 2015. Your views on the site have served to reinforce my commitment.

    Needless to say, this election cycle has been anything BUT typical. But regardless of the outcome, I am not bailing out. I will say that my risk tolerance is high, but I can say that BECAUSE I have reaped the rewards of being a long-term investor. I tried many years ago to time the market and got burned way more often that I got lucky.

    I have 9 years to go before retiring and I will be keeping my TSP investments in the stock-based funds until I do punch out. After retirement I’ll roll over most of my TSP to a stock-based traditional IRA, while keeping enough in my TSP account to live on for about 10 years (income). That amount will be put in the G fund after the roll-over. Later on down the line, I will transfer some of the traditional IRA funds back into the TSP G fund. Again, for income.

    Looking forward to your next update. Until then, everyone buckle up! We could be in for a rough ride in the coming weeks.

  13. I’m seeing some interesting comments to this post. I can appreciate almost all of them. However, I’m seeing two conflicting, polarizing contexts: Move to the G fund or stay the course. Both can be correct. 1. If you will need your TSP in the next few years then the G Fund move may be the smartest thing you can do. 2. However if you have five or more years until you can touch your TSP, a big market adjustment now is a huge opportunity for disciplined, dollar cost averaging investors.

    I enjoy this forum immensely. However much like this polarizing election campaign I think emotions are running high. That’s the last thing you want affecting a major investment move.

    Other similar forums are succumbing to emotional reasoning and I think it’s unfortunate to see some of it showing up here. I think everyone agrees the markets are going to be chaotic for at least the short term. Chaos can either be the mother of opportunity for those investing for the long term or the red flag to cut your losses for the short term preservation of wealth. Both options are perfectly acceptable based on your investing time-line and tolerance.

    Keep your constructive comments coming I really enjoy reading other investors opinions!

  14. Moving to the G due to only having 27 months before i retire.
    If the market is trending up later this week after the election I can always jump back in to the C & S

    1. The damage is done. Markets will open much lower tomorrow long before your transaction would take effect. I believe it will start to bounce back after a bad day or two.

  15. Thanks Paul. I’m more concerned about this being more long term than a few days. More of a market correction. However, the rebound after brexit gives me solace…

    1. I’m in the same boat, trying to decide if I stay the course. I have LOTS of years before retirement, so if I’m reading Paul correctly, I’ll stay put.

  16. I had a different opinion than TS Paul, so I jumped ship yesterday morning into the G fund. Since I saved all my gains, should I go back into the C and I funds since they will be low or wait a few days for the volatility to die down?

  17. Hi, I’m a newbie on this site. My question(s) concerns TSP fund allocation for those already in retirement. Most retirees, myself included, no longer contribute to the TSP funds and therefore do not benefit from increases accruing on contributions over the long term. Short term declines have a significant impact on our bottom line because money is being withdrawn on a regular basis, rather than added, so there is no potential to make up those losses over the long term through future contributions. That is, retirees do not have the luxury of knowing that despite present short-term or long-term downturns, in a few years my balance will be back to normal, that things will be back up again, or that contributions during the down-times will only add to the portfolio’s value.

    My question (and you may not be prepared or willing to offer an answer) is how and under what triggers would you be changing allocations if you were retired, short of withdrawing all TSP money and placing it in private-run funds. Granted, this is a much more complex equation and answer, but I’m just seeking information from those that may know. The traditional 60/40 retirement mix no longer seems to be working in today’s economy where stocks and bond prices seem to now move more often in tandem rather than in traditional opposition.

    1. Cfw,

      You may want to move your question to the forums. I’m not sure how many folks read these posts once Paul drops a new one. He’s already discussing the post-election way forward in a new post.

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