Market Impacts During Election Years

07-15-2024

cindylundbergverdecm-com|07-15-2024

As financial advisors, one of the most common concerns we hear from clients revolves around the impact of presidential elections on their investments. With the 2024 election approaching, it’s crucial to understand the historical market dynamics during such politically charged periods. Buckle up as we dive into some data-driven insights that can help guide your investment decisions today and during future election years.

Market Performance Under Different Presidencies

Historically, stocks have shown strong performance regardless of the party in power, although certain sectors and markets react differently under different administrations. While it’s essential to recognize the overarching growth trend of stocks over the long-term, it’s equally important to understand there is no consistent correlation between who holds the presidency and how any given asset class performs.

Short-Term Reactions to Election Results

The immediate market reaction to election outcomes can provide insights into investor sentiment as shown in the chart below. Sentiment can be significantly swayed by the outcome of presidential elections, leading to immediate but often temporary market movements. On the night of an election and the days following, markets may react strongly as investors speculate on the potential impacts of the new administration’s policies. When a new president announces major policy initiatives, especially those involving fiscal stimulus, taxation, or regulatory changes, markets might react positively or negatively depending on how these policies are perceived in terms of fostering economic growth or adding constraints. While short-term market responses to presidential elections can be dramatic, they are not always predictive of the longer-term economic impact of a president’s policies. 

Long-Term Trends: A Historical Perspective

Presidents often inherit the economic conditions of their predecessors and their policies may take years to manifest in economic outcomes. Thus, the market’s performance during any given presidency can be influenced by a combination of prior economic conditions, global events, and the specific policies enacted during their term. Looking back to the time of President Kennedy, the S&P 500 has only posted negative returns during the presidencies of Richard Nixon and George W. Bush. This underscores the general upward trajectory of the market over time regardless of political leadership.

Investment Strategy Based on Political Party

While it might be tempting to adjust your investments based on the party in office, historical data suggests this might not be the best approach:

  • Investing only during Republican presidencies since 1950 would have yielded an annualized return of 2.80%.
  • Investing during Democratic presidencies would have returned 5.11% annually.
  • Staying invested throughout all presidencies would have resulted in the highest annualized return of 8.05%.

The Myth of Political Impact on Long-term Investment Success

Investors often speculate about the potential impact of presidential elections on the financial markets. However, the long-term data indicates that the person who is Head of State may not be as influential as many think. Significant market trends and economic cycles have spanned multiple administrations, suggesting that other factors—such as global economic conditions, technological advancements, and demographic shifts—play a more substantial role in shaping the investment landscape.

Despite the variability in short-term market reactions to elections, the long-term strategy of staying invested typically yields the best results. Market fluctuations during election periods are normal, but they do not generally disrupt the longstanding trend of growth in stock markets.

The key is to focus on long-term investment goals rather than making drastic changes based on political outcomes, or worse, potential outcomes. Decisions driven by the changing political landscape often lead to missed opportunities and potential misalignment with long-term financial objectives.

Contact a Verde advisor for more insights and information on how you can navigate this politically charged climate.

Source: https://go.ycharts.com/hubfs/How_Do_Presidential_Elections_Impact_the_Market/Election_Guide.pdf

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