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How Will the Election Affect the Markets? Thumbnail

How Will the Election Affect the Markets?

I often field this question from clients around election season. I find that everyone has different motivations for it, as well. Some clients are understandably concerned about their retirement savings being negatively affected by a change (or sometimes a continuation) in leadership. However, almost equally, other people are excited about the growth opportunities and policy changes that a presidential election could bring.

The stock market is influenced by a number of different factors, and presidential elections are certainly no exception. However, it is my opinion that investors have a tendency to place too much focus on the election and fall into a fallacy that it is the most important and single driving force every four years.  Understanding historical trends during election years and the year following can provide investors with valuable insights. While past performance is not a guarantee of future results (you’re welcome, FSG compliance department), examining these trends can help us understand market behaviors when we have election cycles.  Before I get into the details, I think it’s important to first highlight the difference between short term volatility and long term performance.

  • Short Term Volatility is the day to day ebbs and flows of stock prices.  Election years tend to bring with them a lot of uncertainty and polarization. When either of these conditions are present, you have speculation in the markets, causing stock prices to go up and down. When you have both of those things present it tends to heighten that volatility.

  • Long Term Performance is less about what is happening today, and looks more at the big picture.  “Long term” is a relative term, and some may look at it as a full calendar year, while it’s absolutely fair to consider 'long term’ to be a decades long perspective.  Whatever your prerogative is, we need to understand that what happens today, this week, this month, or even this quarter is not long term.

So, what does the stock market’s history tell us about how the United States presidential election could affect your investment portfolio?  To keep things simple and objective, I am going to reference a lot of data reflected in the “Election” client resource kit provided by a third party company, First Trust.  A link to their website, and specifically these charts, is cited below at the end of this article. 

  • General Trends.  Generally, U.S. stock markets have shown positive performance during election years (1).  That’s not to say there is a 1,000 batting average (actually, it’s 83%), but those few years with negative performance can often be attributed to outside factors like the dot com bubble, the 2008 Financial Crisis, or World War II, for example.

  • Incumbent vs. Challenger.  Data suggests that markets tend to perform better when a new president wins the election.  Now an incumbent victory doesn’t automatically equal negative performance or even underperformance but there is an average 5% difference in favor of a new administration historically (1).  There are any number of opinions as to why that is true.  I’m no political scientist, so I will leave the debate of cause and effect to the professionals.

  • Pre-Election Volatility.  The months leading up to an election are typically characterized by increased volatility.  As I mentioned earlier, the volatility I’m referring to is the short term day to day changes in stock prices.  Investors react to campaign promises, debates, and opinion polls, which can cause short term fluctuations in market values.  Volatility is the price of admission for growth in the capital markets, as these fluctuations in price can create both opportunities and risks for investors.  As the market reacts to changing expectations about the election's outcome and its potential impact on economic policy.

  • Post-Election Market Behavior.  Following an election, markets often experience a relief rally, especially if the outcome aligns with investor expectations. This rally can be driven by reduced uncertainty and clarity on the policy direction of the new administration.  In some cases, markets may also experience a "honeymoon" period in the initial months of a new presidency.

  • Sector Specific Reactions.  Diversification is key in your investment portfolio.  While overall market sentiment can look positive, certain sectors may react differently based on the winning candidate's policy platform. For highly regulated industries, the outcome of the election could bring a lot of changes.  Those changes could go either way, depending on the industry, the economic policy of a president, and the sentiment of constituents.  My colleague, Brice Carter, wrote an article about what it means to truly be diversified.  When you are properly diversified, you can mitigate a lot of this regulatory and sector risk by investing in companies that have little or opposite correlation with each other.

Overall, while presidential elections can bring uncertainty and volatility to the stock market, historical data suggests that markets often recover and perform positively over the long term. Investors should be cautious but not overly reactive to short term market movements, focusing instead on maintaining a diversified portfolio and a long term investment strategy.

Written by: Justin Meyer 

1  https://www.ftportfolios.com/Commentary/Insights/2024/7/3/election-client-resource-kit---june-2024 
This commentary on this website reflects the personal opinions, viewpoints and analyses of the Financial Strategies Group, Inc employees providing such comments, and should not be regarded as a description of advisory services provided by Financial Strategies Group, Inc or performance returns of any Financial Strategies Group, Inc Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Financial Strategies Group, Inc manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.


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