After what has already been a challenging year (in almost countless ways), many investors are worried about how markets may react in the fourth quarter. With the presidential race underway and a pandemic raging on, economic uncertainty hangs over investment portfolios. It’s natural for some investors to wonder whether they should sit on the sidelines until the dust settles.
Uncertainty Creates Opportunity for Long-Term Investors
While it may not always seem this way, uncertainty is positive for investors in the long run. This is because times of uncertainty create opportunities. Having the fortitude and discipline to invest when others are too nervous to do so has historically been rewarded.
There is perhaps no better example than the past six months. Those investors who considered sitting on the sidelines after the bear market crash that began in February would have missed the recovery if they blinked. During the third quarter of 2020, the S&P 500 fully recovered its losses and gained 8.5%.
Not only are U.S. stocks now up 5.5% for the year, but the round-trip required only six months. This period is further evidence that it’s difficult to time the market effectively and that overreacting to short-term market developments can often backfire.
Chart: The stock market has recovered since March. This chart shows the S&P 500 along side various moving averages.
The market did stumble during the third quarter due to concerns about technology stocks, especially more speculative ones. This speaks to the growing importance of large technology companies to our economy. Many that are considered to be technology companies are actually in sectors such as Consumer Discretionary and Communication Services.
As a whole, tech-led sectors and growth stocks have still significantly outperformed this year. Through the end of the third quarter, the Russell 1000 Growth Index rose 23% while the Russell 1000 Value Index fell over 13%.
Why Has the Stock Market Done Well Despite the Pandemic?
Why has the broad stock market done well despite the pandemic? This is largely driven by the economic recovery that has been underway since cities and businesses began to reopen in the summer. Nearly all economic data show a bounce-back in many areas, including hiring, consumer spending, manufacturing activity, and more. Of course, there are industries which will take much longer to recover including restaurants and travel.
However, as we begin the fourth quarter, the presidential election is only a month away and the country is as polarized as ever. History has shown that while elections are incredibly important for all Americans as taxpayers, voters and citizens, it’s important to keep a level head when investing.
The Market Has Performed Well Under Various Political Party Combos
This is because the stock market has performed well over the past century under a variety of different presidents and parties. A reasonable analysis shows that there is no combination of political parties for the White House and Congress that has averaged less than 10% in annual total returns. In other words, from a stock market perspective, there is no compelling reason to believe that one party or another will directly cause a recession or stock market crash.
Charts: This chart shows the average total returns for the S&P 500 when different parties control the White House and Congress since 1933. For instance, there have been 34 years when a Democrat was in the White House and both the Senate and House were also controlled by Democrats.
This fact may be difficult to swallow for many investors. After all, politics affect many parts of our lives, making it hard to separate personal and political beliefs from our investment portfolios. This is why having the discipline to do so is a critical ingredient to long-term success.
Maintain Discipline, Don’t Be Swayed by Rhetoric
Additionally, investors and the broad market are often wrong about the impact of presidents and their policies. It was generally accepted leading up to the 2016 election that a Trump presidency would result in an immediate economic crisis and a stock market crash. Not only did this not happen, but the stock market proceeded to make new highs. The same is true during the 2008 and 2012 Obama reelection campaigns when it was argued that having a Democrat in the White House, and later the Affordable Care Act, would tank the stock market. This didn’t happen either.
Ultimately, investors should recognize that uncertainty is a key ingredient to achieving long run stock market returns. Although Q4 may be fraught with uncertainty, it’s also clear that many parts of the economy are recovering from the economic shutdown. The balance of these factors will be what matters for long-term investors in the years to come.