Markets and Elections
We have less than 100 days left until the presidential election
s and a common question is: “How does the winner of the presidential election impact markets?” Is the market going to go down because of the uncertainty or will the market go up or down based on who wins the election? These are just some of the questions we hear a lot from clients.
While the outcomes of the elections are uncertain, one thing we can count on is that plenty of opinions and forecasts will be floated in the days and weeks to come.
We would caution investors against making short-term changes to a long-term plan to try to profit or avoid losses from changes in the political winds. For context, it is helpful to think of markets as a powerful information-processing machine. The combined impact of millions of investors placing billions of dollars’ worth of trades each day results in market prices that incorporate the aggregate expectations of those investors.
Every four years, the U.S. presidential election can have a major impact on policy, laws, and foreign relations. But how do presidential elections affect the market? And how could that affect your investment plan? We looked at past market performance around election years and noticed a few interesting points.
- It is difficult to identify systematic return patterns in election years.
- Data from 1928 to 2017 suggests that on average, market returns have been positive both in election years and the subsequent year.
- Looking at returns from 1929 to 2019 it appears that it does not seem to matter which party wins the election and returns don’t seem to be higher or lower during presidential terms of a Republican or Democrat President.
The chart below is also a good reminder that while some suggest that a particular president or party is “good” or “bad” for the stock market, ultimately, it’s long-term fundamentals that matter, and the historical data seems to indicate that that as well. We all remember 2016, when the TV pundits thought markets would tank after Trump was elected. Markets did go down the day after the election, but 2017 was overall an incredibly strong year. Few people had the confidence that markets would appreciate after Trump was elected, but those that stuck with their plans were rewarded. Data seem to indicate that growth occurs no matter which political party is in power and is driven by the fundamental health of the economy in general, rather than political points of view.
We believe that the best strategy to weather any choppiness in the markets starts from building the right portfolio, tailored around one’s planning needs, and making sure there is enough diversification. We believe that sticking to a longer-term strategic plan, one that is designed for more than one election cycle, can help weather the volatility. The economy—and therefore the market—is simply bigger than the direction the political winds are blowing.
As always, we are here to listen to your questions and concerns so please don’t hesitate to reach out.
Important Disclosure Information:
Different types of investments involve varying degrees of risk, including the risk of loss of your entire investment. Past performance is not indicative of future results. CPWM and its employees can give no assurance that the performance of any specific investment recommendation or investment strategy discussed herein, whether directly or indirectly, will be profitable, or that it will be equal to any historical performance level discussed herein. The discussion or information contained herein is not intended to be, and should not be deemed as, personalized investment advice. The recommendations made may not be suitable for your specific individual situation and we encourage you to discuss with your financial professional before undertaking any investment strategy or recommendation contained herein. The discussions contained in this blog is current only as of the date hereof and may change due to a number of factors, including varying market conditions.