To Inform:

This week I had the same general question asked in two separate client meetings:

“I have some cash to invest, with the pullback in the markets, should I put the money in the market now?”

My response was: “No, let’s dollar cost average the funds. You can put some funds in now, but let’s also save some cash to invest later. This could be a volatile year, but we want to buy the dips.”

In other words, my thinking was to prepare for a year with more market ups and downs. Why? Part of our logic is knowing this is a mid-term election year.

The chart below looks at the average mid-term election year compared to “typical” years for the S&P 500 with data going back to 1931. As you can see from the chart, mid-term election years are historically more volatile and have lower (but still positive) returns for stocks. One of my most used quotes, attributable to Mark Twain, is “history doesn’t repeat itself, but it often rhymes.” If current events indeed rhyme with history, we could see a volatile period for the next few months, before markets start to rally later in the year.

Source: Capital Group

As long-term investors, should we fear volatility? The answer is not necessarily as it could create a buying opportunity. The chart below provides some context, looking at the Presidential Cycle going back to 1960. The bad news is that mid-term election years tend to have the largest market pullbacks (called drawdowns), but the good news is that one year after the pullback, markets tend to have the strongest gains of the cycle.

Source: Strategas Research Partners

It is also worth noting performance gains after mid-term elections have not only been positive, but they have also been consistently positive. The chart below shows the S&P 500 return one year after mid-term elections with data going back to 1950, and returns have been positive every time.

Source: Capital Group

So, you may be thinking, “isn’t this year different because of the war with Iran?” According to Strategas, “something always happens in mid-term election years.” It seems like this year, that something is the war. And it’s interesting to note the pattern so far compared to history is uncanny. As the chart below shows, the red dotted line shows the performance of President Trump’s second term relative to the historical Presidential Cycle and even with the war, the S&P 500 is hewing very closely to the historical pattern.

Source: Strategas Research Partners

Bottom line: markets may be in for a volatile ride in the months ahead, but IF the history of the Presidential Cycle provides any guide, that volatility should be looked at as a buying opportunity.

Written by Travis Upton, Partner and Chief Executive Officer