As you can imagine, I am frequently asked about the upcoming election and the potential impact this will have on the stock market and individual portfolios. While there are no guarantees of market performance, we can look back on the history of the stock market to make reasoned and rational decisions around your investment portfolio. If you are a long-term investor, the stock market has historically shown a general upward trend despite the short-term volatility seen during political and global events.
In this article, we’ll explore how elections have influenced the stock market in the past, address common concerns, and explain why maintaining a long-term perspective is key to success, no matter the election result.
The Market and Election Years: History as a Guide
Elections often stir concerns about the potential for market upheaval. While elections can lead to short-term volatility, historical data suggests that the stock market’s long-term upward trend remains consistent, no matter which party wins.
Research from Investopedia found no clear correlation between which political party is in power and overall stock market performance. Whether Democrats or Republicans control the White House, markets have tended to rise over time. This holds true whether Congress is unified or divided.
Typically, market volatility stems from uncertainty leading up to elections, but once results are known and policies become clearer, the market often stabilizes and resumes its upward path.
Historical Insights: What Past Elections Tell Us
Some notable examples from recent history show how the market responds to elections:
- 2020 Election: Despite political turmoil and the pandemic, the Dow Jones Industrial Average (DJIA) rose by over 17% between October 2020 and March 2021. Once uncertainty faded, the market surged .
- 2016 Election: After Donald Trump’s unexpected victory, the DJIA rose over 12% from October 2016 to March 2017 . Investors who stayed invested through election uncertainty saw strong gains.
These examples underscore that while short-term market movements around elections are unpredictable, long-term investors who remain steady tend to benefit.
The Pitfalls of Market Timing
One of the biggest mistakes investors make during election years is trying to time the market. There’s often a temptation to sell assets before an election to avoid perceived risks, and then buy back in when things “settle down.” This strategy often backfires.
For instance, during the 2016 election, many investors anticipated a market downturn due to uncertainty. However, after an initial dip on election night, the market rallied, ending the year with a strong 12% gain. Those who sold out missed the upswing .
Research from TIAA Wealth Management reinforces this point: nearly all election years since 1928 have ended with positive stock and bond returns . Investors who remain patient through election cycles tend to fare better than those who attempt to time the market.
As financial planner Shinobu Hindert says, “If you want to capture those gains, you have to be able to stomach some of this volatility” . The lesson here is simple: stick with your long-term plan and resist the urge to react impulsively to election-related market fluctuations.
Economic Policy: It’s More Complex Than You Think
Many investors worry about how a new administration’s policies will impact the market. However, historical evidence shows that specific policies from a new president typically have less long-term impact than expected.
For example, during the Obama administration, concerns over potential tax hikes and regulations were prevalent, yet the market more than doubled between 2009 and 2017. Similarly, despite corporate tax cuts and deregulation under the Trump administration, the stock market’s growth pattern stayed consistent with prior trends.
As noted in the Wall Street Journal, financial professionals often advise against making political bets in your portfolio . The market responds to a multitude of factors beyond U.S. politics, including global economic conditions, and it’s difficult to predict how political changes will affect specific sectors.
The Case for Staying Invested
So, what’s the best strategy during election years? The answer is to stay invested and stick to your long-term goals. The data is clear: long-term investors come out on top, even when election-year volatility strikes.
As noted in the Wall Street Journal, all but four election years since 1928 have ended with positive stock returns, and the average stock return in election years is 10.2%, nearly identical to non-election years . The market’s resilience over time suggests that staying the course is the best way to grow your wealth.
Key Strategies for Election Year Investing
Here are a few essential strategies to guide you through election-year investing:
- Focus on Your Long-Term Goals: Remember why you’re investing. Your financial goals—retirement, education, or building wealth—are long-term.
- Don’t React Emotionally: It’s natural to feel unsettled by election-related news, but history shows that reacting emotionally often leads to missed opportunities. Trust your long-term strategy.
- Diversify Your Portfolio: Diversification is critical for managing risk, particularly in times of uncertainty. Spread your investments across different asset classes to minimize exposure to any one area.
- Avoid Political Betting: The market’s performance doesn’t hinge on who wins the presidency. As history shows, both Democratic and Republican administrations have seen market growth. Avoid making drastic portfolio changes based on political predictions.
- Consult a Financial Advisor: If you’re unsure how to navigate the election year, consider working with a financial advisor who can provide guidance based on your specific situation. They can work with you on a strategy that aligns with your long-term financial goals.
Conclusion: Trust in Long-Term Investing
As we’ve seen in past elections, the market may experience short-term volatility, but it has always recovered and continued to rise. As we approach the 2024 election, my advice remains: stay the course, avoid knee-jerk decisions, and trust in the stock market's long-term resilience.