Don’t Let Politics Dictate Your Investments

3 Mins read

As the upcoming presidential election looms, it’s important to remember that mixing politics with your investment portfolio may not be a wise decision. The truth is, no one can accurately predict the outcome of the election or determine how it will impact the stock market. There are numerous factors at play that can have a much bigger influence on the market than who emerges victorious between Donald Trump and Joe Biden.

When we look at historical data, we find that presidential election years are not drastically different from average years in terms of market performance. According to Bespoke Investment Group, the S&P 500 has experienced an average gain of 6.8% during presidential election years since the end of World War II. While this is slightly lower than the long-term annual average return, it still demonstrates a relatively stable market.

Patterns tend to emerge in the market during election years. As Bespoke analysts noted on Jan. 24, the S&P 500 typically remains somewhat flat in the first quarter, followed by a rally leading up to the end of summer. However, this rally slows down as we approach the election in November. Nevertheless, any consolidation during this period tends to be offset by a strong performance in the final months of the year.

Contrary to popular belief, Republican victories do not necessarily result in better market performance. Adam Parker, CEO of Trivariate Research, conducted a thorough analysis of U.S. presidential-election years since 1928 and found that the S&P 500 actually returned an average of 12% during the first year of Democratic presidencies, compared to just 2.7% during Republican presidencies’ first year.

However, this data alone does not present the full picture. It’s worth noting that in the year leading up to the election, the S&P 500 saw a 9.1% increase before Republican presidents took office, whereas it only rose by 3% before Democrats were elected.

“There are data for both sides,” Parker wrote on Monday. “Does the market anticipate a Republican and then perform in advance? Or is the market’s performance better when Democrats are Presidents? Or a third view—one we have sympathy for—that all of this is largely overwhelmed by other issues.”

In conclusion, it’s crucial to avoid making investment decisions solely based on political outcomes. The stock market is influenced by a wide range of factors, and even historical patterns may not accurately predict future performance. Instead, it’s advisable to focus on long-term strategies and diversify your investments to mitigate risks. So, keep a level head and let sound financial principles guide your investment decisions.

Making Sense of U.S. Election Outcomes: A Nuanced Approach for Investors

Despite the allure of predicting market trends based on U.S. election results, the usefulness of such analysis is limited due to data constraints. The outcome that has shown the highest post-election returns for the S&P 500 is when a Democratic president is elected, but control of both the House and Senate is handed to the Republicans. Over the following year, this scenario has historically led to an average gain of 17%. However, this specific power distribution has only occurred 10 times in the past 96 years, most recently from 2014 to 2016.

Conversely, a Democratic sweep of the presidency and Congress has been the most frequent outcome. In these cases, the S&P 500 has experienced an average rise of 13% over the next year. Less common is Republican control of both Congress and the presidency, which has resulted in an average return of 9.9%.

Interestingly, a combination of a Republican Senate, a Democratic House, and a Democratic president has never occurred. On the other hand, a Democratic Senate with a Republican House and president was witnessed from 2000 to 2002. Following the 2000 election, however, the S&P 500 saw a significant decline of more than 22% in the year after due to the bursting of the dot-com bubble.

It is important to acknowledge the limitations of drawing conclusions from this relatively small sample size.

In the current year, investors should consider numerous factors that could have a more significant impact on markets than the composition of the U.S. government. These include the outlook for U.S. and global economic growth, the timing and scale of Federal Reserve interest-rate cuts, and geopolitical conflicts. In light of this complex landscape, confidently predicting market direction solely based on the U.S. election outcome is challenging – even after the voting is complete.

According to Parker, an expert in the field, investors with long-term goals should refrain from making portfolio adjustments based on U.S. election outcomes. Instead, a comprehensive and balanced approach is recommended.

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