We are amid another presidential election year, and as an advisor who has guided clients through nearly eight presidential elections in my professional career, I often get asked how elections influence investments and the broader financial markets. While it’s tempting to make quick moves based on election outcomes, it's important to understand the underlying dynamics at play.
Based on what I have seen over the years, here’s a comprehensive look at how elections can impact your investments and how to navigate these times.
Market Behavior During Election Years
Election years are typically marked by increased market volatility. Investors tend to react to the uncertainty of potential policy changes and the ups and downs of campaigns in the months that lead up to the election. Uncertainty of any kind affects the markets and can cause short-term fluctuations in stock prices, bonds, and other areas of finance.
Historically, though, the stock market has performed slightly better during and in the year following a presidential election, regardless of the winning party1. This can be attributed to the market's preference for stability once the uncertainty of the election is resolved.
So, in short—market fluctuations are often a product of uncertainty, not necessarily the fact that it’s a presidential election year.
Key Factors Influencing Market Reactions
To understand what drives the uncertainty, there are a few key areas that are impacted by the government that cause the market to react.
- Policy Proposals:
- Tax Policies: Changes in corporate and individual tax rates can have significant impacts on market sectors. For example, a proposed corporate tax cut might boost the stock market, while tax hikes could lead to short-term declines. Taxes are always a topic discussed by presidential candidates, so this accounts for some of the variations you may see. For example, a topic this election is what will become of the 2017 Tax Cuts and Jobs Act and its provisions that are set to expire at the end of 2025.
- Regulation: Different administrations have varying approaches to regulation and the industries it affects, like energy, healthcare, and technology. Deregulation can benefit industries like finance and energy, while increased regulation might favor sectors like renewable energy and healthcare. Sectors and industries will be responding to election outcomes, which you guessed it—also can cause volatility.
- Government Spending:
- Infrastructure projects, defense spending, and healthcare reforms can drive growth in specific sectors. Understanding the likely winners of increased government spending can help investors position their portfolios accordingly.
- It should be noted, however, that no party has been significantly better on a fiscal level since the 1950s. Generally speaking, government spending has outpaced income for decades and decades2. Keep this in mind when it comes to your investments.
- Trade Policies:
- Changes in trade policies, tariffs, and international relations can affect multinational corporations and sectors dependent on global supply chains. Investors should monitor how candidates’ trade stances might impact global markets.
Investment Strategies During Election Cycles
To put it simply, to be a successful investor during an election year, or any other year, it’s important to stick to the basics of investing. Investing is a long game, so staying steady during times of uncertainty can potentially bode well for your investments.
- Diversification: Maintaining a diversified portfolio is crucial for investing, and also helps weather the storm during election periods. After all, diversification helps mitigate the risk of sector-specific volatility and ensures a balanced approach to investing.
- Long-Term Focus: It’s important to keep a long-term perspective. While short-term market reactions can be significant, the overall impact of an election on long-term investment growth is typically less pronounced. Avoid making impulsive decisions based on daily headlines.
- Stay Informed: We are always monitoring key policy proposals of candidates and how they might impact various sectors. This knowledge can help us make informed decisions and adjust clients’ portfolios if necessary.
Elections undeniably impact the markets and your investments, but remember to maintain a measured approach. By staying informed and avoiding knee-jerk reactions, you can position your portfolio to weather the volatility and capitalize on potential opportunities.
Remember, while elections are significant, they are just one of many factors that influence the financial markets. Feel to reach out to us if you have questions.
1Forbes.com, 2024
2Invesco, 2024
Diversification does not assure or guarantee better performance/profit and cannot eliminate the risk of investment losses in declining markets.