As the U.S. presidential election approaches, it’s natural for investors to become anxious about the potential impact on their portfolios. With all the media attention and constant sound of predictions, it’s easy to believe that the outcome of the election will dictate market movements. But history tells a different story.
In reality, elections cause fluctuations but do little to determine long-term market performance. So how should you as an investor navigate the political climate and protect your portfolio from the noise? Here’s what you need to know.
Uncertainty: the market’s biggest challenge
Elections are synonymous with uncertainty, and markets are known to dislike uncertainty. This year’s race is shaping up to be one of the closest in decades, which could increase market volatility in the short term. However, investors should avoid knee-jerk reactions based on political headlines.
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Historically, markets have shown remarkable resilience during election periods. In fact, data shows that since 1970, the S&P 500 has returned an average of 11.6% during election periods, which is higher than its average annual return of 9% to 11%. This illustrates an important point. The best course of action in the face of uncertainty is often to stay invested. Trying to time your business during periods of market volatility rarely works. Even missing a few of your best performing days can significantly reduce your long-term profits.
Does the political party in power matter?
A common misconception is that the stock market performs better under one political party than another. However, when analyzing decades of market data, we find no clear correlation between party control and stock market performance. Whether you’re a Democrat or a Republican, the stock market has historically produced positive returns over time.
A ruthless and calculating market
It’s important to remember that the stock market is not driven by ideology or political commitments. At the heart of the market is a mechanism for valuing companies based on their future earnings potential. It is a ruthless, calculating organization that cares about corporate profits, not policy debates.
When a new president is elected, markets quickly adjust to anticipated policy changes and factor in the potential impact on corporate earnings. Whether the issue is taxes, tariffs, or regulations, the market’s primary concern is how those policies affect a company’s profitability.
In some cases, policies deemed harmful to a particular sector may already be factored into stock valuations before implementation. Meanwhile, businesses have proven time and time again that they can adapt to changing regulations, innovate, and find ways to grow, regardless of the political environment.
focus on the basics
The election may dominate the headlines, but it’s just one of many factors influencing the market. Global economic trends, changes in interest rates, corporate earnings, and consumer behavior all play a much more important role in determining long-term market performance.
Bottom line: Don’t let elections derail your strategy.
The US election may add further market uncertainty, but it is important not to derail your long-term investment strategy. History shows that markets reward patient investors who stick with policy, regardless of the political outcome.
Rather than reacting to political headlines, focus on the basics like a diversified portfolio, a clear financial plan, and the discipline to stay invested during volatile times. Doing so will make it easier to achieve your economic goals, no matter who sits in the White House.
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This article was written by and represents the views of our contributing advisors and not of Kiplinger’s editorial staff. You can check your advisor’s record with the SEC or FINRA.
