Despite election outcomes, markets see 'consistent ascent'

History has recorded a "consistent ascent" in US equities regardless of presidential elections and tenures, argues Wes Crill, Dimensional Fund Advisors Senior Investment Director and VP. Crill joins Yahoo Finance Live to discuss what the upcoming election will mean for investors' portfolios.

Just days after Biden's nomination, value stocks outperformed growth stocks by nine percentage points, Crill states. But the market's historic rise was not because of Biden, Crill notes: Pfizer had just released efficacy results for vaccine testing. "That's a reminder that whatever plays out for this election, even if your favored candidate doesn't end up making it to the White House, there's so many other things that will drive the performance of the stock market. Unless you can predict what those other pieces of news will be, it's best to stay invested in and capture what the market has to deliver," Crill says.

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Editor’s Note: This article was written by Gabriel Roy.

Video Transcript

So with the presidential election approaching, many investors might be wondering how politics will affect their portfolios. Our next guest is doing extensive research on how stocks do during an election year. Joining us now is Wes Crill Vice President and Senior Investment Director at Dimensional Fund Advisors. Wes, it is good to see you. So I imagine Wes this is a topic of conversation with your clients. They must be asking you all questions. What is this election going to mean for their portfolios? What are you telling them, Wes?

Yeah. And thanks for having me on today. I think it's a very natural question for investors to have. They might have certain expectations for how the presidential race is going to play out and the ramifications for the stock market from there. But one thing we always encourage investors to remember, is that when we look back at the history of the stock market, when you break it up into different presidential terms, it's been remarkable. And it's consistent ascent through the years. There's been 16 different presidents since 1929. 13 of them have left the White House with the stock market higher than when they became president.

And I think this goes back to first principles. If you think about as a business owner, what are my objectives at the end of the day? While I'm trying to maximize my revenues, trying to minimize my costs. So that I can grow my profits. I'm going to have that objective as a business owner no matter who is in the White House. Whether it's a Republican or a Democrat. So I think that's consistent with what we see that over the long haul. Stocks have rewarded investors who stayed disciplined with their asset allocation.

With that said, I have to wonder if history is a gauge for this type of election. When you're talking about two candidates who have both been in the White House. One currently in the White House, one formerly in the White House. Two very unpopular candidates as well. I mean, is this a gauge? Can we use history as a measure of where-- what the market reaction is likely to be? Given the historic nature of this particular presidential election.

Yeah we don't have to go too far back in history to see evidence of the fact that there's many things that will impact markets. Above and beyond the presidential election. We can go back to 2020. So many of you will recall the election results were finalized over the course of the weekend. Well, Monday morning, November 9th 2020 for those historians out there, looked at markets. And we saw that value stocks in the US were outperforming growth stocks by 9 percentage points that day. Now just to put some context around that.

That's the third best outcome for value versus growth in almost 26,000 days of recorded history in the US stock market. Was it because of the election? No. It was because that same day Pfizer had released efficacy results for their vaccine testing. We saw that there was a potential for the pandemic to end more quickly than many of us had expected at the time. So that could have been a big needle mover. And so I think that's a reminder that whatever plays out with this election, even if your favorite candidate doesn't end up making it to the White House. There's so many other things that are going to drive the performance of the stock market.

And unless you can predict what those other pieces of news are going to be, it's best to stay invested and capture what the market has to deliver.

I'm interested too, Wes, why we have you. Just switching gears. Just your general take on the market obviously continues to grind. Has been grinding higher here. Does it continue in the near to intermediate term, do you think, Wes?

Yeah. One of the things that gives investors pause when they're seeing a market going up. Is they think, well, when it hits a new high, does that mean that there's going to be downside risk? And some people think of it as a new high as a cliff. That's not what we see in the data. In fact, when you look at every time the US market has hit a new high, the subsequent three year return looks like just an unconditional return over any randomly selected three years.

And it's consistent with the idea that people are not going to invest in stocks. Unless they are getting a positive expected return. Stocks bring with them a certain level of risk. And if you're not getting compensation for that risk, investors aren't going to sign up for that. So the market has to have a positive expected return. We know there can be adverse developments. New information comes to light that can drive markets downward. But where we sit today, based on the information market participants have.

Whatever their expectations are for the future. That is being built into current market prices. So there is an expected return that's positive for stocks.

Finally, Wes, if we can bring it back to maybe political policy here. You when you think about the former President, Donald Trump has talked about if he wins this election, he would like to extend the tax cuts that were put in place under his administration. He's also talked about ramping up tariffs as well. As an investor, how do you look at that right now? How do you assess that beyond the November election?

Yeah. I think any of these policy changes are things where the intent behind it, the potential ramifications, the way it's going to unfold. These are largely going to be known in advance. It might not be 100% certainty that they're going to go through. But whatever the process is going to be investors have ample time to bake in their expectations for these outcomes. It's not unlike economic expectations or things that are relatively slow moving that are signaled far in advance. Fed activity is another classic one.

And what we see is that investors, generally, have not been able to successfully get ahead of those types of outcomes. And again, if we think about what could impact market prices from a presidential campaign or regulatory reform point of view? There's going to be so many other things simultaneously. They're going to impact market prices. That if anything, it's just going to be part of the great den of uncertainty. And not something investors can really get ahead of when it comes to their portfolios.

We often say investors should vote with their ballots not with their portfolios.

Some good takeaways there. Wes Crill, it's good to talk to you today. I really appreciate the time.

Thank you.