As we approach the 2016 presidential election, we’ve noticed an uptick in questions regarding how the stock markets will be affected. A recent survey found that “26% of Americans indicate they’ve become more cautious with their money as a result of events surrounding the 2016 presidential campaign” (Bankrate Money Pulse Survey, 2016). While elections can certainly feel like the only piece of news this time of year, it’s important to remember that this is only one of many factors determining a year’s market performance. What really drives performance in the markets is not the presidential election, but rather the overall macro economy.
While it’s true that returns tend to be lower in election years, they still tend to be positive. Since 1948, the S&P 500 has gained an average of 6.1% in election years, compared to 8.8% in any given year. In that same timeframe, the S&P 500 has posted a positive gain 76% of the time during elections years versus 71% in other years. (Source: MarketWatch, 12/15)
Remember, we are investing for the long term. Just like we aren’t going to panic and make rash decisions due to short-term market volatility, we aren’t going to panic and make rash decisions based on who gets elected. Usually “concern” about future events in the market place presents a buying opportunity however, we aren’t buying in established accounts due to a still sluggish economy and high price-to-earnings ratios.
It’s important to remember that markets have performed well under both of the nation’s main political parties. Indeed, the U.S. economy finds a way to grow and markets continue to perform despite all the changes in political parties, Congressional actions, tax laws and government regulations.
Election years and rhetoric around market performance during election years should not dictate your investment decisions. Instead, it’s useful to focus on the basic fundamentals of sound investing, diversify your portfolio appropriately and invest for the long term.
History has shown that markets have demonstrated relative resiliency regardless of election results or the current popularity of elected officials. Economic conditions will have a far greater impact on the elections than the other way around, as presidents only have a limited ability to affect the economy.
Any volatility related to the presidential election alone will be short-lived and ultimately will not change the fundamentals in the economy. The careful diversification of your portfolio has been designed to cushion the effects of any short-term market volatility.
Please feel free to call us at 888-545-4746 to discuss this topic further.