In a recent article, I discussed a number of behavioral techniques that advisors can use to help clients manage their emotions and stay focused on their long-term goals during the 2024 election season.

One of those tactics centered on the concept of commitments, which maintains that we as humans seek to be consistent with our promises.

When speaking with a client who may be emotional about the election and its possible negative effects on their portfolio, an advisor might appeal to this tendency by saying: “Can we agree that we will revisit your entire financial plan before making any wholesale changes to your investments?”

In this situation, the commitment puts space between the emotional present and a hopefully more rational point in the future. For this approach to be effective, however, advisors need to consider what may happen between now and the end of the election cycle so they can set expectations with clients and help them prepare for what may lie ahead. And that could include negativity and market volatility. But it could also include, as I’ll show at the end of this article, market gains.

Negativity dominates election coverage…

Researchers have studied the way the media covers presidential candidates for decades, and their findings should serve as a warning to investors who may be tempted to make changes to their portfolios based on what they read or see in the news over the next several months.

The scholar Michael Robinson once noted that the news media took some common advice and turned it upside down: “If you don’t have anything bad to say about someone, don’t say anything at all.”¹

That tendency toward negativity has been directed at candidates of both parties over the years. In fact, except for Barack Obama in 2008, no presidential nominee since 1984 has received news coverage that was substantially more positive than negative.²

The lack of positive sentiment – which is also encountered on social media as well as traditional media – can certainly exacerbate investors’ election anxiety. At the same time, the sheer volume and frequency of information we are subjected to every day can be overwhelming. And while it can be difficult to stay focused amid all the political noise, advisors can – and should – play a key role in helping clients avoid making irrational decisions. That can be done by presenting investors with facts, which I’ll discuss next.

…while market volatility increases leading up to Election Day

As the media coverage ramps up, we will also likely see greater volatility in financial markets leading up to Election Day. In fact, a look at the CBOE Volatility (VIX) Index over the last 20 years shows that volatility levels have historically spiked close to presidential election dates.³ (Recall that the VIX is a real-time market index that represents the market’s expectations for U.S. equity market volatility over the coming 30 days.)

Furthermore, looking at VIX data for the last eight presidential elections going back to 1992, while the average annual level varies significantly from year to year, in every case but one (2012), the VIX Election Day close has been higher than the annual average.

Of course, it’s important to note that the VIX shouldn’t be considered only in annual, year-over-year terms, but I believe the elevated volatility levels around past election days may indicate how investors’ nerves can lead to emotional decisions.

As we have discussed before, this short-term volatility has not negatively affected election-year performance of the S&P 500^® Index, nor has it significantly influenced existing market trends.

Sticking to our commitments

Going back to the concept of commitments, if an advisor proposes that an emotional client wait a certain period – until after the election is decided, for instance – before making wholesale portfolio changes, it helps to take a long-term view of how markets have performed under past administrations.

Below, we break down the average performance of the S&P 500 during the first, second, third, and fourth years of each president’s term, going back to Harry Truman in 1945. To do this, we used the president’s inauguration day as our starting point for each market year. If the president came into office after inauguration day due to death (as in the case of John F. Kennedy and Lyndon Johnson) or departure (as with Richard Nixon and Gerald Ford), we used their first day in office as the beginning of the market year. (For example, Richard Nixon’s second year in office ran from January 20, 1974, to August 9, 1974, and Gerald Ford’s first year subsequently ran from August 10, 1974, to January 19, 1975.)

Over all those years, through all those presidencies, over a period when Democrats and Republicans held office for 3,802 and 3,615 days, respectively, we see that markets, on average, tended to go up. Sure, there have been good years and bad, but overall, staying invested across presidencies has historically been additive to one’s portfolio.

It’s understandable that negative news coverage and increased volatility around presidential elections can make investors feel anxious. But that anxiety doesn’t have to lead to irrational decisions. Advisors can help clients put the negativity and volatility in perspective by using historical data to show that it pays to stay the course. And as discussed in my previous article, incorporating behavioral tactics – like the “commitments” example – in combination with that data can provide the right mix of logical and emotional support.

IMPORTANT INFORMATION

Equity securities are subject to risks including market risk. Returns will fluctuate in response to issuer, political and economic developments.