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With each U.S. presidential election, the narrative of its significance on, well, everything in American life, reverberates through public discourse. This year, the age of the candidates, reproductive rights, foreign wars, the climate crisis, and democracy itself, are all dominating headlines. And we’re still months out from Election Day. Each new sound byte may stir up different emotions for each of us, but what we all share is a universal feeling of uncertainty that lingers through an election year.
That uncertainty trickles into investing, too. The true impact of these political events on the stock market remains a topic of debate as much as the actual debates. Win or lose, how will each presidential candidate affect financial markets? By examining historical trends, investors can gain a deeper understanding of how elections influence market dynamics and shape investment strategies.
Debunking the Myth of Election-Year Volatility
It’s true that election years often witness heightened market volatility as investors grapple with uncertainty surrounding potential policy changes. Equities and bonds both tend to perform less optimally in the year leading up to presidential elections compared to non-election years, for instance.
Yet, while there is often volatility leading up to elections, historical data suggests that the market tends to rebound after elections, with stronger-than-usual performance in the year following. Historical data since 1950 indicates that U.S. stocks have averaged returns of 9.1% in election years, pointing to a trend of market growth during these periods, according to Denise Chisholm, director of quantitative market strategy at Fidelity.
"While the 12 months preceding a presidential election have had the widest range of possible market outcomes relative to other parts of the election cycle, the average return isn't substantially better or worse. This points to the presidential election not being a notably 'market moving' event," Chisholm says. “The election cycle is usually not the dominant theme of the market.”
While elections may cause short-term fluctuations, they rarely dictate long-term market trends. This underscores the importance of maintaining a steady investment strategy anchored in fundamental principles.
Evaluating the Intersection of Political Ideologies and Investment Decisions
Despite differences in fiscal policies between political parties, historical data suggests that the party in power has minimal impact on market performance. Markets are inherently nonpartisan, and making decisions based on political promises could be problematic.
If we look at 2024, for example, there are several possible governing outcomes that could change investment opportunities and decisions. In a scenario of unified Republican control, priorities might include extending the tax changes stemming from the 2017 Tax Cuts and Jobs Act, which will otherwise expire at the end of 2025, and rolling back provisions of the 2022 Inflation Reduction Act. Under unified Democratic control, there might be a resurfacing of the provisions and priorities included in the Build Back Better Plan. And under a divided government, there may be a continuation of gridlock, with the next administration relying primarily on regulations, rather than on new laws, to execute its agenda. As likely as any of these predictions could be, we don’t know what will happen until it happens, says Naveen Malwal, institutional portfolio manager with Strategic Advisers, LLC.
“There are dramatic differences between the proposals expressed on the campaign trail and the actual policy changes that take place once the candidate is in office," Malwal says. “It's exceedingly rare that a candidate will be able to deliver on exactly what they've proposed once they take office. If you're making investment decisions based on such proposals, that could be a risky way of managing one's money.”
Long-Term Strategies for Investment Resilience Amid Political Uncertainty
Investors are advised to focus on long-term financial planning to navigate the complexities of an election year. Regardless of what happens and who is elected, experts emphasize going back to basics and making decisions rooted in sound investment principles.
For instance, maintaining a diverse portfolio with a mix of different securities and investments in a variety of industries will protect your investments as the market fluctuates. Dollar-cost averaging, a strategy where investors invest a fixed amount of cash at regular intervals, can lower your investment costs while maximizing returns. Additionally, take advantage of a high-yield savings account or cash management account to take advantage of high-interest rates for emergency, liquid cash.
Most of all, don’t panic. Making impulsive decisions with your investments is never wise. You’re investing for long-term goals, and short-term fluctuations won’t have lasting effects. If you’re worried your portfolio isn’t properly diversified or that you have the wrong allocation for your needs, time frame, and risk tolerance, it may be helpful to consult with a financial advisor. They can review your portfolio and provide personalized advice based on your current finances and goals. By prioritizing resilience and adaptability, investors can weather the ebbs and flows of political cycles with confidence.
Conclusion
While the fervor of election cycles may captivate public attention, their influence on financial markets is nuanced. Historical data shows that long-term investment strategies are king, even through election years. As investors chart their course amid political uncertainty, a steadfast commitment to prudent investment practices will serve as a beacon of stability amid the ever-changing tides of politics.
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