Every presidential election feels like a media frenzy, and this year has certainly been no different. With an unprecedented change in candidates to an assassination attempt and more, this election season is one for the history books.
As the nation prepares to determine who will control the White House and Congress in the coming years, the media tends to shine an extra spotlight on how these critical decisions may impact the financial markets.
But as an investor, should you be concerned about what the election’s outcome may do to the markets? To help answer this question, we’ll provide some historical context and additional considerations.
Understanding Market Reactions to Elections
Before we discuss how the market has performed during election years in the past, it’s important to consider just how many factors influence market performance.
Significant events like a presidential election (and the events surrounding it) can impact the markets. But so can other things like:
- Geopolitical conflict
- Global pandemics
- Economic data or forecasts (like unemployment rates or GDP)
- Natural disasters
- Large corporate scandals or news
What’s most important to remember is that historically, the markets have always recovered and continued trending upward over the long term. The key is to give your investments enough time in the markets to recover from short-term volatility.
This has rung true throughout remarkable moments in history:
- 1920’s Wall Street market crash
- The Great Depression
- World War II
- The dot-com bubble burst in 2000
- 2008 financial crisis
- The onset of COVID-19 global pandemic
With that in mind, is there some correlation between market volatility and presidential elections?
Looking at the past 24 elections, the S&P 500 has delivered marginally lower average annual returns than non-election years, 11% and 11.6%, respectively.1 There’s also evidence that stock market performance has been historically higher in the year leading up to a presidential election than in the following year. This slight boost may be due to the excitement and hopefulness of campaign promises, though it’s hard to say for sure. Again, so many factors influence the markets it’d be inaccurate to assume the entire year’s performance is based on the election outcome.
Sector Specific Impacts
Speaking of campaign promises, some market sectors—think energy, healthcare, and finance—can be more impacted by election outcomes than others. For example, if a candidate is primarily focused on green energy, investors may adjust their investment strategy or holdings accordingly.
Investor Sentiment
It’s worth remembering that, generally speaking, the markets don’t like change—and election years bring the potential for some significant changes in both the White House and Congress. More people than usual may be tempted to stray from their long-term investment strategy at the first sign of volatility or if they’re concerned their preferred candidate might not win. But again, this volatility has historically been short-lived, fueled by anxiety and uncertainty.
Building and Maintaining a Strong Financial Plan
Try to treat the election year as any other year regarding your portfolio. There are bound to be ups and downs, but if you follow a long-term strategy based on your more significant goals (like retirement), short-term volatility will smooth itself out over time.
You may be prone to emotional or behavioral biases, especially if you feel strongly about one candidate. But your investment decisions should be objective, data-driven, and forward-focused. In the long run, making short-sighted or impulsive decisions does not serve you well—especially considering the historical data indicates that election-year volatility is minimal and temporary.
If you’re concerned about how the markets may move as the election draws closer, try and focus on the core tenets of long-term investing:
Stay diversified: Minimize the impact of volatility in a particular sector or asset by incorporating investments across different asset classes (like stocks and bonds) and industries or regions. Even if one area of your portfolio is impacted by election-related volatility, the other areas will help keep it afloat.
Diversity is essential, and the best portfolio mix is one that you can be patient with. If you have upcoming projects, setting those funds aside in cash may be advisable if the timeframe is short. Having certainty about the funds you know are needed in the short term can help promote the patience needed to be a long-term investor.
Set clear goals: You’re investing for a reason, and sometimes, it can help to remind yourself what those reasons are (especially when you’re tempted to pull out of the markets or make a significant change). Put a “why” behind your wealth, which will motivate you to keep pushing forward even during turbulent times.
Maintain appropriate amounts of risk: Now may be a good time to reassess how much risk you’re comfortable taking on and adjust your asset allocations accordingly. You may want to do this with the help of a financial advisor, though if you’re looking for a quick place to start, you may also be able to find risk tolerance questionnaires or tools online.
Critical Components of a Strong Financial Plan
Remember, your portfolio is only one piece of your financial puzzle. If you’re feeling uncertain about market movements or otherwise anxious about the election, it may help to focus on other areas of your financial life.
Retirement planning: Review your current retirement savings plan and consider whether there are opportunities to increase contributions to your 401(k) or explore new ways to save (such as opening a Roth account).
Emergency savings: A good rule of thumb is to set aside around three to six months of expenses (depending on the stability of your job) in an emergency fund. If you haven’t started separate savings for emergencies, this could be a great goal to focus on in the coming months. Having savings set aside for an unexpected event can help protect the other areas of your financial life, like your retirement savings or portfolio.
Tax strategies: Aside from filing a tax return every April, you may want to work with a financial advisor and tax professional to develop year-long tax-minimization strategies. These might include tax-loss harvesting within your portfolio, charitable giving, tax-deductible retirement contributions, and more.
The Role of Financial Advisors in Navigating Market Fluctuations
Election year or otherwise, a financial advisor can help you maintain a long-term perspective even during market volatility and downturns. With an unbiased and objective point of view, your advisor can help you work through your emotional reactions to market movements and avoid making short-sighted decisions that may otherwise have long-term ramifications.
They can help you adjust your portfolio not based on what’s going on with the markets but on your unique goals, risk tolerance, and values.
The Power of Consistent Investment and Financial Discipline
While elections can create market volatility, focusing on a solid financial plan and long-term vision is crucial for achieving financial success. Yes, the markets have historically experienced some short-term volatility during election years. But does that mean you should change your investment strategy or pull out completely? No, probably not.
Suppose you’re feeling anxious, uncertain, or unclear about what the upcoming election may mean for your financial well-being. In that case, we highly recommend reaching out and scheduling time to talk with our team. We’re here to review your current financial standings, answer any questions, and keep you informed on what’s happening in the markets.
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