How do Presidential Elections Impact the Stock Market?

Posted by Creekmur Wealth Advisors on 9:00 AM on November 2, 2020

Only you preside over your retirementOver the past months much has been said about how the presidential election might impact the stock market. Although we can't predict what will happen in this unexpected year, we can learn a lot from history.

One thing we can learn for sure - Your patience has a bigger impact on your investments than the president. 

Market strategists and economists regularly ignore election polls and personal characteristics of candidates, they tend to focus on models using historical trends and then add in key economic data, including growth rates, wages, unemployment, inflation and gas prices to predict voting behavior and election outcomes.1

IMPACT of CAMPAIGN PROMISES

If you're worried about the toll the future president's campaign promises could have on your pocketbook, taxes or even your future retirement savings, you're not alone. While it sometimes feels like candidates are just telling us what we want to hear, generally, politicians do try to accomplish the things they say they'll do when elected to office.

However, due to America's system of checks and balances, no president can single­handedly accomplish all of their goals, and occasionally, compromises have to be made. While presidential candidates usually have big dreams of changing the world, it can be difficult for a sitting president to achieve all of their goals. On average, about two-­thirds of campaign promises are kept.2

So while changes are bound to happen, it takes a while for legislation to be passed, making the likelihood that you'll see a huge impact immediately low.

THINK LONG-TERM not PRESIDENTIAL TERM

One of the biggest things you can do to help protect your nest egg is to make sure you're comfortable with the levels of risk you have in your current portfolio. When investing in the market, it's important to keep volatility in perspective. Market corrections - a decline of at least 10% of a stock, bond, commodity or market index from its highest recent point - are common and don't always indicate a bear market. Corrections are generally temporary and typically end when the price of a stock or bond "bottoms out" and investors start buying again.

Many things can lead to a market correction, including profit selling, technical analysis and corporate earnings. A broad sense of fear based on a negative event in the news or perception about the economy can trigger a sell-off, and in turn, a correction - the same is true with presidential elections.

For instance, as Bill Clinton's 1996 re-election seemed more likely, the Dow Jones Industrial Average surged, rising through Election Day and into the next year. On the other hand, when George W. Bush's re-election seemed uncertain a week before the 2004 election, the market tanked. After his victory, the Dow gained 10.6% through the end of the year.4

It's important to remember that the stock market - while fairly volatile on a short-term basis - has a strong track record of long-term success. Since 1980, market corrections have averaged about 14.6%.5  However, looking at the overall picture each year, the positive years outweigh the negative years, with negative returns occurring approximately one out of every four years.6  As history has shown, those who choose to stay the course are rewarded for their patience more often than not.

Considering all of the unknowns and the uncertainty of what the markets could do, one of the biggest things you should remember is to be patient and not to panic. This explains why most prioritize "time in the market, not timing the market."7

If you're comfortable with the amount of risk you are currently exposed to and have the time to ride out whatever may come, you're likely best to stick it out and see what happens. On the other hand, if you're within three to five years of retirement, it may be a good idea to review your financial strategy to make sure you're comfortable with the level of risk in your portfolio.

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1 Ben White and Steven Shepard. Politico. March 21, 2019. "How Trump is on track for a 2020 landslide." https://www.politico.com/story/2019/03/21/tru m p-economy-election-1230495. Accessed Dec. 3, 2019.

2 Timothy Hill. FiveThirtyEight. April 21, 2016. "Trust us: Politicians keep most of their campaign promises." https://fivethirtyeight.com/features/trust-us-politicians-keep-most-of-their-promises/. Accessed Dec. 3, 2019.­

3 Jacob Hillesheim. Rewire. Sept. 11, 2019. "Do political candidates just tell us what we want to hear?" https://www.rewire.org/our-future/political-candidates-campaign-promises/. Ac­cessed Dec. 3, 2019. 

4 Connor Smith. Barron's. Nov. 4, 2019. "History says elections are a drag on stocks. Why 2020 could be worse." https://www.barrons.com/articles/elections-stocks-uncertainty-why-2020-could-be-worse-51572635274. Accessed Dec. 3, 2019.

5 Howard Gold. MarketWatch. Oct. 17, 2018. "Opinion: If U.S. stocks suffer another correction, start worrying." https://www.marketwatch.com/ story/if-us-stocks-suffer-another-correc­tion-start-worrying-2018-10-16. Accessed Dec. 3, 2019.

6 Dana Anspach. The Balance. June 29, 2020. "20 Years of Stock Market Returns, by Calendar Year." https://www.thebalance.com/stock-market-returns-by-year-2388543. Accessed Aug. 28, 2020.
7 Jeffrey M. Jones. Gallup. June 17, 2020. "Americans More Upbeat About Personal Finances." https://news.gallup.com/poll/312722/americans-upbeat-personal-finances.aspx. Accessed Aug. 24, 2020.

This content is provided for informational purposes only and it is not intended to serve as the basis for financial decisions. The information and opinions contained herein provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. All investments are subject to risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in period of declining values.  Prepared by Advisors Excel © 2020 Advisors Excel, LLC  10/20-1385469C

 

 

 

Topics: Tolerating Risk with Investments, Investing, Retirement, impact of presidential elections

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