Election day is a few months away, and it’s natural to wonder what the possible outcomes might mean for your portfolio. Fortunately for investors, there are many previous elections we can study to give us insight into how the market might react.
Policy Matters, Politics Doesn’t
The most important thing to keep in mind is that policy matters to long term investment returns, but politics doesn’t. Everything that will happen between today and election day is just politics. As the election gets closer, both sides will undoubtedly ramp up their rhetoric. Political vitriol can cause market volatility, but it doesn’t change the fundamentals of the economy. No matter what the outcome of the election is, we will be well into 2021 before policy changes are made. History also shows us that policy changes rarely work out as planned, and often have unexpected effects. For long term investors, there is no reason to rush to make portfolio changes just because it is an election year.
To understand the future, study the past.
The way the markets react to elections and changes of power in Washington is remarkably consistent over time. Historically, when Republicans control Congress and the White House, the markets tend to go up and the economy tends to grow. When Democrats control Congress and the White House, the economy tends to grow and the markets tend to go up. When there is divided government in Washington, the markets tend to go up, and more often than not, the economy grows.
History tells us that during the run-up to an election, market volatility increases. Despite the increased volatility, the market most often trades sideways in the months ahead of an election. Uncertainty is a far greater problem for the markets than who wins or loses an election. Once the results are known, long-term trends take over.
Policy changes might have an impact on individual companies or entire industries. Policy changes won’t derail the long-term trends that have created tremendous returns for investors over the past 100 years. American capitalism is still the engine that powers the global economy. Long-term investors in American businesses will continue to be rewarded no matter who wins the election.
Matthew A Treskovich | CPA/PFS, CITP, CMA, CFP®, AEP®, MBA, CLU, ChFC, FLMI
Chief Investment Officer