Election day is ahead, and while you may favor a particular political party, the markets (and more important, your investment portfolios) generally only favor one thing: investor patience.
As citizens and taxpayers, elections are important to us because they determine the principles we want to uphold and the type of country we want. However, as investors, it’s vital we don’t let politics distract us from achieving our long-term financial goals.
Long-term investors should be wary of claims that one candidate or another will “derail the market.” It’s likely that this has been said about every president since the founding of modern stock exchanges. In recent times, it was certainly said about both Presidents Obama and Trump, and is now said about a variety of candidates. These claims simply suggest that markets are hard to predict. Thus, the best course of action for long-term investors, regardless of political preference, is to stay invested and maintain the discipline to avoid reacting to political noise
Election results won’t make or break your investment strategy
Government policy can certainly have an impact on economic growth, and can affect specific stocks, bonds, and sectors. However, for most long-term investors, it makes more sense to focus on economic and stock market fundamentals, such as inflation, job growth, and monetary policy, than day-to-day poll or election-day results. There are two important reasons for this.
- First, it’s the economic cycle that matters for investment returns, and this has more to do with factors that drive growth than with who is in office. Market conditions are largely driven by economic, industry, and technological performance and trends, not politics.
- Second, the impact of economic policy is difficult to evaluate and often works with a lag. For instance, while corporate tax cuts may result in a short-term jump in the stock market, the true economic benefits (if any) will play out over years and decades. While there are policies that can promote economic growth, the record shows that it’s incredibly difficult to predict the economic impact of any particular proposal.
Don’t let election news affect your portfolio
The chart below shows the performance of the stock market in election and non-election years. As you can see, they are pretty similar, indicating that elections don’t have a huge impact on the market. The slight differences between the two are likely due to the timing of a couple of bear markets (markets in which stock prices are falling) – namely, the tech bubble from 2000 to 2002, and the financial crisis of 2008.
These down periods were caused by the underlying fundamentals of the market as a whole, and even though they landed on election years, it is not likely that the election had much to do these major market events. In actuality, these events stemmed from more systemic economic issues.
Average stock market performance during election and non-election years, 1933 – 2017
Voting is about your principles, not your portfolios
If we exclude election years, the chart displays how elections don’t often have a dramatic effect on performance. Even the small differences in election year performance vs. non-election year performance can probably be attributed more to investor behavior than the election itself. Investors should not allow election headlines to unduly affect decisions they make about their portfolios, as many times the headlines pass and the market cycle continues on.
Maintain a balanced portfolio regardless of political views
Today, the economic cycle is probably approaching its peak. We’re almost in the tenth year of the current business cycle, unemployment is near 50-year lows, and interest rates are creeping up.
It’s essential as investors to maintain a balanced portfolio in this environment, despite your political views. Regardless of who is voted into political office during elections, patient investing is a smart way to manage your investments over the long haul.
Editor’s Note: This article was originally published in November 2018 and was updated and republished on March 5, 2020.