Should Investors Be Concerned About The Presidential Election

Here’s the short answer: The stock market doesn’t care about elections, nor should investors.

It happens every four years like clockwork. Investors agonize over the coming presidential election and worry about its impact on the markets and their portfolios. For as long as the stock market has existed, investors have tried to link election outcomes with stock market performance, hoping to divine how a particular outcome will affect their investments so they can preemptively adjust their strategy.

Anyone looking hard enough should be able to find some historical data that seemingly supports the idea of a link between stock market performance and presidential election results. But none that decisively shows any direct causal relationship—at least enough of one to warrant serious consideration for changing investment strategies.

Why Investors Should Or Shouldn’t Be Concerned Over The Election

Sure, there are reasons why investors should be concerned during a presidential election year, but none more so than any other year. Investors need to remember that the stock market, with its millions of participants, continuously adapts in expectation of economic changes six to 12 months out. While the stock market will continue to react to short-term events, to a great extent, it’s already looking past the November election.

So, for every reason one might find for investors to be concerned over the election, there’s one supporting no cause for concern.

Reasons For Investor Concern Over The Election Increased Uncertainty:

Election years are often marked by heightened uncertainty related to policy changes that could affect the economy, which can lead to short-term market volatility. Historical data shows that the stock market tends to underperform the average during the 12 months leading up to the election.

Sector-Specific Impacts: Though elections may not have a meaningful effect on medium-to-long-term stock market performance, they could affect individual market sectors based on proposed policies by either party. For example, if a Republican wins the White House, we may expect spending priorities to benefit the energy and defense industries. In contrast, a Democrat might propose policies that favor healthcare and green energy.

While your portfolio could benefit if you own stocks in the affected sectors, it could also get hurt if the wrong candidate wins. It could be better to own all-weather companies that perform well in any environment.

Psychological Impact: Media coverage and public discourse in social media tend to get hyperbolic during election years, creating heightened negativity and fear, which leads some investors to make emotional decisions instead of sticking to their long-term plans.

Reasons Investors Shouldn’t Be Concerned

Limited Historical Impact: While short-term market volatility can be expected during an election year, studies show mixed results on the long-term effects of elections on the stock market. While short-term fluctuations might occur, historical data suggests the market always recovers, with long-term fundamentals playing a more prominent role.

Policy Implementation Hurdles: Even with policy changes, implementation can take time and face legal challenges, diluting the immediate impact on the market. For example, it took nearly four years to implement the Affordable Care Act (ACA) fully. The full effect of the ACA wouldn’t be felt for eight to nine years after Barack Obama was elected in 2008.

Focus On Long-Term Goals: A presidential election can be consequential, but the stock market views it as a short-term event with short-term implications. While it may react negatively at the moment, it always has its sights set on the future. Investors with a long-term perspective should stay focused on their investment goals and ignore the short-term election noise.

Things To Consider During An Election Year

Stay Informed: It’s always a good idea to keep yourself updated on election developments and how potential policy changes might impact you. But basing any investment decisions on that information amounts to speculation.

Consider Diversification: Review your portfolio to see if it is diversified across various asset classes and sectors to help mitigate risks associated with election-related volatility.

Prioritizing Quality: The more investments you have in high-quality, well-managed companies, the less there is to worry about their long-term performance. Companies with global brands, competitive market positions and solid returns on invested capital (ROIC) are best positioned to weather market volatility.

Sticking To Your Plan: If you have a thoughtful investment plan based on your individual circumstances and risk profile, you may not want to deviate from it due to temporary election-related noise.

Consult A Financial Advisor: If you’re unsure how potential election outcomes could impact your investment portfolio, seeking guidance from a financial advisor can be helpful.

Remember, presidential elections are just one factor among many that can influence the market. By staying informed, diversifying your portfolio and focusing on your long-term goals, you can make informed investment decisions and navigate election cycles with confidence.

The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.

Jonathan Dash,
Founder and President
Email: info@dashinvestments.com