Many investors wonder if they can tweak their existing exposures to be either more defensive against volatility or more opportunistic if certain sectors face future policy tailwinds.
Elections are a time of great uncertainty in which investors often want to prepare their portfolios for increased volatility. While reallocating to cash can be a risky strategy as the opportunity cost is high and markets tend to rebound very quickly after the election ends, many investors wonder if they can tweak their existing exposures to be either more defensive against volatility or more opportunistic if certain sectors face future policy tailwinds.
Analysis shows that it can be difficult to devise a sector investing strategy based on who is or could be in the White House. The chart below looks at S&P 500 sector dispersion and average performance since 1990 under Democratic presidents (19 years) and Republican presidents (15 years). It shows that average returns were higher in all 11 sectors during Democratic administrations than Republican administrations.
However, this analysis is skewed by 2008, which was the worst performance year since 1990 for 8 of the 11 sectors. The only three sectors that didn’t have their worst years in 2008 were consumer discretionary and communication services, which had their worst years in 2022 under a Democratic administration, and utilities which had its worst year in 2001 under a Republican administration after rallying a whopping 57% the prior year. Without 2008, Republicans preside over the worst years for only 5 of the 11 sectors, the best year for consumer staples in 1991, and outperform on average in materials.
Democrats presided over the best years for 10 out of the 11 sectors but without much consistency on when that occurred: financials and health care (1995), technology (1999), utilities (2000), materials (2009), industrials and consumer discretionary (2013), real estate (2021), energy (2022), and communication services (2023).
However, just as a Republican administration can hardly be blamed for presiding over the onset of the financial crisis in 2008, a Democratic administration cannot be celebrated for outsized returns in technology during the tech bubble. Therefore, it is very difficult to discern sector performance patterns under different administrations that could reliably repeat themselves in the future, even if a party is relatively consistent over time on policies they strive to implement in different industries.
Furthermore, even if there were discernable patterns investors could act on, there is a difference between who investors think will win a future election vs. who eventually wins. Even if one could accurately predict the next president, the configuration of Congress is critical to enable the president to enact their agenda. Even with a one-party sweep, increasing political polarization doesn’t guarantee harmony and agreement within a party. Finally, the economic climate could easily derail a party’s agenda or non-economic issues could become more pressing.
Therefore, repositioning portfolios based on past sector performance may be futile. Instead, investors should focus on the fundamentals in the economy and markets and practice a disciplined approach.