As we enter the home stretch of the U.S. presidential election, you may be worried about how the outcome could affect your investments. Who will win? What new policies should I anticipate? Which political party delivers better stock market performance? What could the result mean for the economy and financial markets?
Which political party delivers better stock market performance?
The reality is that the stock market is party agnostic. It doesn’t demonstrate allegiance to one political party over another. “Bull markets and bear markets come and go, and it’s more to do with business cycles than presidents,” says Jeremy Siegel, the Russell E. Palmer Professor of Finance at the Wharton School of the University of Pennsylvania.
The cyclical nature of market performance means that there are favorable, and unfavorable times during Republican and Democratic administrations. Indeed, market performance is complex, and each presidency faces its own economic challenges and circumstances. Interestingly, I’ve noticed that some of the favorable periods occurred when we had a divided government (when the president and at least one or both houses of Congress are of opposite parties). Of course, it could be coincidental, but markets tend to dislike uncertainty.
How does political uncertainty impact the stock market?
As we noted, markets don’t like uncertainty and can be sensitive to short-term moments. Consider that when President Eisenhower suffered a heart attack in September 1955, stocks dropped 6.5% in a single day. After President Kennedy was assassinated in November 1963, stocks immediately dipped 3%. Markets move in cycles and can be resilient. In both instances above, the market quickly rebounded.
In 2016, U.S. and European stocks fell sharply overnight on the eve of the general election but bounced back and even rose slightly the very next day.
With Election Day coming, what should you do?
Market participants are human beings, which means biases and emotional decision-making are part of our wiring. We know that markets can move in a particular direction for no reason. We also know that it’s important to not let short-term market movements influence our investment decisions. That’s always easier said than done because as humans, we like to be in control, or at least believe that we are.
Here’s the good news: markets are not preordained to move in a certain direction solely because a certain politician wins an election, including a presidential election. In other words, when it comes to your portfolio, it doesn’t really matter who wins the White House.
I firmly believe that a critical aspect of sensible investing is to accept the reality that there are many things that we can’t predict or control, and some of them may move markets.
Regardless of the outcome of the elections this November, market cycles will assert themselves, unexpected events will occur, and some companies will thrive while others struggle. Through it all, the best way to address the known and inherent risks to the capital markets — and the unpredictability that so often rears its head — is to align your portfolio to your goals, employ a sensible approach to diversification, and stay focused on the long-term.
Ultimately, our position in the business cycle, not the reigning political party, has the greatest effect on the economy and the financial markets. In times of uncertainty and stress, it is natural to want to “do something” to relieve that stress. This is a good opportunity to revisit your financial plan to ensure that your asset allocation is in line with your financial goals and that your investment strategies are designed to weather the volatility that may result from the upcoming election and the news cycles that will precede it.