As election season heats up, many investors wonder whether the political outcomes will significantly impact their investment portfolios. With each presidential election cycle, the media is filled with speculation about how different candidates’ policies could sway the stock market. However, while it might be tempting to adjust your investment strategy based on the anticipated election results, historical data, and expert analysis suggest that elections, by themselves, should not dictate your investment decisions.

Market Reactions to Elections

The idea that elections dramatically affect the stock market is a common belief, but the data does not always support it. While presidential elections can indeed set the direction for public policy, which may have longer-term economic implications, the immediate market reaction is often less predictable and more muted than many assume. Research from Vanguard, covering data back to 1860, shows that there is no statistically significant difference in the performance of a balanced portfolio (60% equities and 40% bonds) during presidential election years compared to non-election years.

This finding aligns with broader trends indicating that market movements during election years often reflect more than just the political landscape. Markets respond to a wide range of factors, including economic fundamentals, corporate earnings, interest rates, and global events. Therefore, trying to time market moves based solely on election outcomes is likely a flawed strategy.

S&P 500’s average election-year path since 1950: Truist Advisory Services | Graphic by Lewis Krauskopf

Historical Patterns Around Elections

Contrary to popular belief, elections do not always bring about heightened market volatility. Data from 1984 to 2020 indicates that volatility tends to decrease around presidential elections. In fact, the 100 days before and after an election have shown lower annualized volatility compared to other periods. This reduced volatility might be due to the market’s pricing in potential outcomes well in advance or reflecting broader economic trends rather than just the election news. This stability should reassure investors that the market is resilient, even in the face of political uncertainty.

Bearing that in mind, while the attention around elections can create a perception of instability, the actual impact on market volatility is often less dramatic. For investors, this suggests that the best course of action may not be to react impulsively to the political headlines but rather to maintain a steady approach in line with a long-term investment strategy that prioritizes cutting out the noise of any given year, including election cycles.

The 2024 Presidential Election Scenario

The 2024 election, featuring Democratic Vice President Kamala Harris and former Republican President Donald Trump, presents a particularly interesting case study due to the unexpected departure of President Joe Biden from the race. Such high-profile contests tend to sharpen investor focus on potential policy changes that could affect the stock market, especially concerning tax policies, tariffs, and sector-specific regulations.

It’s crucial to remember that, historically, election outcomes have had minimal long-term effects on market performance. In fact, historical analysis of the stock market’s performance reveals that market trends are more influenced by economic and inflation dynamics rather than the specific outcomes of elections. This underscores the importance of maintaining a long-term perspective and focusing on broader economic indicators rather than getting swayed by political developments. This emphasis on the long-term should make investors feel secure in their investment strategies.

Navigating Election Year Investment Strategies

Investing during an uncertain election year requires focusing on foundational investment principles rather than the transient political climate. Historical data supports the resilience of U.S. markets during election years, showing that they have generally continued to rise despite perceived volatility. This resilience illustrates the nonpartisan nature of markets and the limited impact of political events over the long haul.

For investors, the takeaway is clear: prioritize economic fundamentals over political cycles. Maintain disciplined investment strategies that align with personal financial goals and risk tolerance. Attempting to predict sector-specific impacts or adjusting portfolios based on speculated election outcomes is fraught with risk, as market returns have historically been positive across various partisan combinations.

The Stock Market and Presidencies: Clearnomics, Standard & Poor’s

Long-term Strategies Over Short-term Fluctuations

During election years, it’s natural for investors to experience anxiety due to the uncertainty surrounding political outcomes. Historically, the S&P 500 has averaged a gain of 7% during election years since 1952, though deviations can occur based on specific circumstances like economic crises or global events. Investors are generally advised to employ long-term strategies such as dollar-cost averaging, diversification, and avoiding knee-jerk reactions to political headlines. These strategies help in mitigating the risk of market timing errors and maintaining a steady course towards investment objectives.¹

Furthermore, staying informed about relevant economic and political developments, while filtering out sensationalism, can aid investors in making well-rounded decisions. It’s crucial to keep in mind that while markets may react with volatility in the short term, the broader economic indicators such as growth, inflation, and corporate earnings play a more significant role in determining long-term market trends.

Ignore the Election Noise

Presidential elections are undoubtedly important events with the potential to influence market sentiment and policy direction, but they should not drive your investment decisions. The key to prudent investing lies in adhering to a well-crafted financial plan, focusing on long-term goals, and responding to what can be controlled. This disciplined approach ensures that investors can navigate election-induced volatility and continue progressing towards their financial objectives without undue stress.

If you have any questions, give us a call. For additional insight, read “Wealth on Purpose” by Bryan Ballentine.

Sources: Located at the bottom of the article

Copyright © 2021. Ballentine Capital Advisors. All rights reserved.

Our mailing address is: 

Ballentine Capital Advisors
15 Halton Green Way
Greenville, SC 29607

Sources:

Presidential elections matter but not so much when it comes to your investments

How presidential elections affect the stock market

Investing during an uncertain election year

How election years affect the stock market (a look through time)

¹ https://www.stash.com/learn/stock-market-during-election-years/ 

Disclosure:

Ballentine Capital Advisors is a registered investment adviser. The advisory services of Ballentine Capital Advisors are not made available in any jurisdiction in which Ballentine Capital Advisors is not registered or is otherwise exempt from registration.

Please review Ballentine Capital Advisors Disclosure Brochure for a complete explanation of fees. Investing involves risks. Investments are not guaranteed and may lose value.

This material is prepared by Ballentine Capital Advisors for informational purposes only. It is not intended to serve as a substitute for personalized investment advice or as a recommendation or solicitation or any particular security, strategy, or investment product.

No representation is being made that any account will or is likely to achieve future profits or losses similar to those shown. You should not assume that investment decisions we make in the future will be profitable or equal the investment performance of the past. Past performance does not indicate future results.