Elections have historically brought heightened volatility, but little long-term impact on stock performance. More important than investing for an election outcome is investing for the long haul, says CIO of U.S. Fundamental Equities Tony DeSpirito.

Elections are notoriously peppered with angst, anticipation and speculation. And this one is seen as particularly consequential. As investors, however, we believe elections also should be approached with humility — and a grain of salt.

As discussed in our Q4 market outlook, promises and proposals made on the campaign trail offer an indication of a candidate’s intentions, but bureaucracy, compromise, lobbying and politics help shape the reality once in office. At the same time, markets don’t always behave as conventionally expected. We saw that when defense and many so-called “sin stocks,” deemed to be losing propositions under an Obama presidency, outpaced the S&P 500 Index from 2008 to 2016.

Investing for a particular outcome can be a fool’s errand. We prefer to let bottom-up company fundamentals inform our investment decision-making. Ultimately, the stock market has advanced regardless of the party in the White House: A hypothetical $1,000 investment in U.S. equities in 1926 would have grown to nearly $9 million as of June 30, 2020, according to data from Morningstar.* The key takeaway: It’s important to stay invested.

That said, the uncertainty of election years causes many investors to retreat to cash while waiting out the volatility. COVID-19 has exponentially increased uncertainty, and cash balances, in 2020. This is illustrated in the charts below.

Investors build up cash in election years
Election-year fund flows, 1993-2020

Election-year fund flows, 1993-2020

2020 cash hoarding has been extreme
Year-to-date fund flows, through June 30

Year-to-date fund flows, through June 30

Source: BlackRock, with data from Morningstar as of June 30, 2020. Money market funds, stock funds and bond funds are represented by their respective U.S. fund categories as defined by Morningstar.