Concerned about stock markets during a US presidential election year?

Susan Powers, CFA, CFP®, CPA, CPFA |

Changing your investments solely because it is a US presidential election year is not the best strategy.  Instead, focus on your long-term goals, risk tolerance, and overall portfolio diversification.  While election years introduce uncertainty, long-term stock market trends are driven by larger economic forces like corporate earnings, interest rates, and global events.  

  • Pre-election Volatility - Uncertainty around election outcomes often leads to volatility in the months leading up to the election, as investors try to anticipate the potential policy changes.
  • Historical Election Year Returns 1944-2020 - On average, the S&P 500 has generated a positive return in 76% of presidential election years since 1944.
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Deciding whether to change your investments during an election year depends on several factors, including your financial goals, risk tolerance, and time horizon. 

Here are some key considerations to help you decide:

 

1. Avoid Emotional Reactions to Short-Term Volatility

  • Election-related volatility is common, but reacting to short-term market swings could lead to poor decisions. Trying to time the market often results in missed opportunities.

2. Review Your Risk Tolerance

  • Elections introduce uncertainty, and markets don’t like uncertainty. If you’re uncomfortable with volatility and concerned about potential risks, it may be worth revisiting your risk tolerance and ensuring your portfolio reflects your comfort with potential swings.

3. Stay Focused on Long-Term Goals

  • If you have a long-term investment horizon, you may want to stay the course rather than make major changes. Markets tend to recover from short-term volatility and election results don’t generally dictate long-term market performance.

4. Evaluate Sector-Specific Risks

  • Different sectors can be impacted by election outcomes based on candidates’ policies. For example, healthcare, defense, and energy sectors may be more sensitive to election results due to regulatory or policy shifts.  Be sure to stay diversified!

5. Consider Dollar-Cost Averaging

  • If you're concerned about volatility, using a dollar-cost averaging (DCA) strategy (investing a fixed amount regularly) can help reduce the impact of market swings by spreading out your investments over time.

Conclusion:

Changing your investments solely because of an election year is not the best strategy. Instead, focus on your long-term goals, risk tolerance, and overall portfolio diversification. If you're uncertain, give us a call.  We can help you make informed decisions based on your unique circumstances.

Here’s a look at how the stock market performed in several past U.S. presidential election years, focusing primarily on the S&P 500 index, which is a key benchmark for market performance:
 

Historical S&P 500 Performance in Presidential Election Years:

  • 2020 (Biden vs. Trump):
    • S&P 500 Return: +16.3%
    • Despite the COVID-19 pandemic and significant economic disruption, the stock market ended the year strongly, largely driven by stimulus measures and investor optimism around vaccine rollouts and a recovery. The election itself created some uncertainty, but the market rallied post-election.
  • 2016 (Trump vs. Clinton):
    • S&P 500 Return: +9.5%
    • Leading up to the election, there was market uncertainty, but after Trump’s victory, the market surged, driven by expectations of tax cuts, deregulation, and infrastructure spending. Financials and industrials performed particularly well.
  • 2012 (Obama vs. Romney):
    • S&P 500 Return: +13.4%
    • In Obama's re-election year, the market saw solid gains. Investor sentiment was buoyed by continued economic recovery from the 2008 financial crisis and Federal Reserve policies that supported low-interest rates.
  • 2008 (Obama vs. McCain):
    • S&P 500 Return: -37%
    • The 2008 election year coincided with the global financial crisis. The stock market experienced one of its worst years in decades as the collapse of Lehman Brothers, housing market crisis, and credit crunch sent markets tumbling.
  • 2004 (Bush vs. Kerry):
    • S&P 500 Return: +9%
    • With George W. Bush’s re-election, the market performed well, supported by economic recovery after the dot-com bust and concerns about terrorism easing. The outcome provided continuity in leadership, which the market interpreted positively.
  • 2000 (Bush vs. Gore):
    • S&P 500 Return: -9.1%
    • The 2000 election was marked by uncertainty due to the prolonged vote recount in Florida. The dot-com bubble was also bursting around this time, which contributed to negative returns for the year.
  • 1996 (Clinton vs. Dole):
    • S&P 500 Return: +20.3%
    • Strong economic growth, low inflation, and rising corporate profits led to a positive market performance. Bill Clinton's re-election was seen as a continuation of a pro-business environment.
  • 1992 (Clinton vs. Bush):
    • S&P 500 Return: +7.6%
    • The economy was recovering from a recession, and the stock market performed reasonably well. Bill Clinton’s election marked a shift in economic policy, but the market maintained upward momentum.

While election years introduce uncertainty, long-term stock market trends are driven by larger economic forces like corporate earnings, interest rates, and global events.