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Global Investment Strategy

February 8, 2016 (Weekly Update)

Tracie McMillion, CFA® Head of Global Asset Allocation Strategy

Weekly insights from the Global Investment Strategy team

  • Market volatility typically increases during U.S. election years.
  • When we divide election years into “open” election years and “reelection” years, we see a marked difference in average returns.

What it may mean for investors

  • Investors should hold a diversified portfolio that includes bonds which can help stabilize portfolios and equities to help provide growth potential over the full economic cycle.

U.S. Elections Intensify Market Volatility

How are U.S. elections related to financial-market performance and could they be contributing to the recent market weakness? This year’s U.S. election is shaping up to be like none other in our recent history. Currently there are 11 candidates running for office of the U.S. presidency. While there are familiar names vying for the oval office like Clinton and Bush, there are also names like Trump and Fiorina that are more familiar in corporate board rooms than inside the Beltway. The variation of views among the candidates within both political parties is one of several factors that are injecting uncertainty into the financial markets. How will this year’s election influence the markets compared to past election years?

The volatility so far this year is greater than what we typically have seen in an election year. The average return for the S&P 500 Index during the fourth year of a presidential term has been11.3 percent. That’s higher than each of the first two years, but lower than the third year.

Chart 1. Open Presidential Election Years, on Average, Underperform Presidential Reelection Years Chart 1. Open Presidential Election Years, on Average, Underperform Presidential Reelection Years
 

Wells Fargo Investment Institute, Strategas Research, February, 2016. Past performance is not a guarantee of future results. S&P 500 Index Average Performance during Presidential Election Years (1933-2014).

When we split election years into “open” election years and “reelection” years, we see a marked difference in average returns. In years when there is an incumbent president running for reelection (whether that president is reelected or not) domestic large-cap stock returns have generally much higher on average than in open election years when there is no sitting president running for reelection. The uncertainty that comes from an open presidential race appears to impact domestic market returns. When we add the wide variation in platforms and ideas that this election season is spawning, volatility is an expected outcome.

A variety of factors are fueling uncertainty in today’s financial markets, including weakness in the oil markets, slowing global growth and monetary policy. In addition, the primary election contests ahead of each Party’s National Convention that will convene later this summer coupled with potential changes to fiscal policies following November’s outcome are also likely contributing to some of the market volatility we are seeing in the domestic financial markets. It is important for investors to bear in mind that resolution to some of this election uncertainty will be forthcoming as the year progresses. With more certainty, markets can respond by reassessing growth expectations in light of likely fiscal policy changes.

In the interim, we believe that investors should hold a diversified portfolio that includes bonds, which can help to stabilize portfolio values in times of distress, and equities that are expected to provide growth potential to the portfolio over the full economic cycle, despite the volatility that this asset group can often exhibit.

Tracie McMillionAbout Tracie McMillion

Tracie McMillion is the head of global asset allocation strategy for Wells Fargo Investment Institute (WFII), an organization that provides global manager research and investment strategy advice to Wells Fargo’s Wealth, Brokerage, and Retirement (WBR) division. WBR is comprised of Wells Fargo Private Bank, Wells Fargo Advisors, Wells Fargo Institutional Retirement, and Abbot Downing businesses, accounting for more than $1.6 trillion* in assets under administration.

In her current role, Ms. McMillion leads the development of global investment strategy. She oversees the creation of asset allocation recommendations and writes economic and market commentary and analysis. Ms. McMillion has been quoted in The Wall Street Journal and Barrons, on CNBC, and in other financial media outlets.

Ms. McMillion has more than 18 years of experience in financial services. Prior to her current role, she served as an asset allocation strategist and a senior investment research analyst for Wells Fargo and predecessor firms. Earlier in her career, she served as lead portfolio manager for Evergreen Private Asset Management where she managed assets for high-net-worth clients and philanthropic organizations.

Tracie earned a Bachelor of Arts in Economics and a Master of Business Administration from the College of William and Mary in Virginia. She is a CFA® charterholder and member of the CFA North Carolina Society. Ms. McMillion is located in Winston-Salem, North Carolina.

*As of Sept. 30, 2014

Risk Factors

Stocks are subject to market risk which means their value may fluctuate in response to general economic and market conditions, the prospects of individual companies, and industry sectors.

Investments in fixed-income securities are subject to interest rate and credit risks. Bond prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline in the bond’s price. Credit risk is the risk that an issuer will default on payments of interest and principal. This risk is higher when investing in high yield bonds, also known as junk bonds, which have lower ratings and are subject to greater volatility. If sold prior to maturity, fixed income securities are subject to market risk. All fixed income investments may be worth less than their original cost upon redemption or maturity.

Diversification does not guarantee a profit or protect against loss.

Disclaimers

Global Investment Strategy is a division of Wells Fargo Investment Institute, Inc. (WFII). WFII is a registered investment adviser and wholly-owned subsidiary of Wells Fargo & Company and provides investment advice to Wells Fargo Bank, N.A., Wells Fargo Advisors and other Wells Fargo affiliates. Wells Fargo Bank, N.A. is a bank affiliate of Wells Fargo & Company.

The information in this report was prepared by the Global Investment Strategy division of WFII. Opinions represent GIS’ opinion as of the date of this report and are for general information purposes only and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally. GIS does not undertake to advise you of any change in its opinions or the information contained in this report. Wells Fargo & Company affiliates may issue reports or have opinions that are inconsistent with, and reach different conclusions from, this report.

This report is not intended to be a client‐specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon.

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