With the upcoming presidential election, we’re getting a lot of questions about how the outcome might impact the stock market and investments. In the best of times, politics can feel crazy and chaotic, and this year is as far from ‘the best of times’ as we’ve seen in a long while! Election years present lots of uncertainty and each election is billed as “the most important election of our lifetime”, so it’s easy to feel anxious about what the future holds. In the near term, the stock market reflects that uncertainty in the form of sharp reactions to every sensational news report or soundbite. Over time, the occupant of the White House and the circus surrounding their election has little, if any, impact on equities. This is the 7th presidential election of my career as a financial planner, and I’ve noticed that all election years seem to follow a similar pattern—ten months of volatility, followed by a two-month tailwind once the uncertainty is removed. The minor detail of who is actually elected seems to be of secondary concern to a stock market that hates uncertainty above all else.
Since the early 20th century, we’ve experienced dozens of elections and administrations, each bringing its own drama and dread/policies and priorities. Despite this constantly shifting political landscape, we’ve seen the stock market march upward at an average pace of around 10% per year for a hundred years. Oddly, out of the past 100, there have only been 12 years in which the market’s total return fell within the 8-12% range—despite averaging 10%. Said another way, 88 out of the 100 years have seen returns significantly above or below the long-term trendline with the average ‘up’ year being 21% and an average ‘down’ year of -12%. To further emphasize the point I’m making, the average intra-year decline has been 14%, meaning, across all the years making up the historical 10% average, the market has gone down an average of 14% at some point during the year. So, while historical data shows that markets have always experienced short-term volatility, and while elections only serve to exacerbate that volatility, markets tend to stabilize and continue growing in the long run—regardless of and despite the outcome.
Make no mistake, markets are constantly reacting to political news. Uncertainty about future policies leads to increased volatility as investors worry about potential changes in tax laws, regulations, and/or governmental spending. This uncertainty invariably fuels temporary market dips and spikes, but more often than not, these reactions are short-lived. The stock market is influenced by a multitude of factors, including corporate earnings, global events, and economic data, so while politics plays a role, it is just one piece of a much larger, more complex puzzle.
If we step back and take a longer view, the stock market has demonstrated remarkable resilience. Regardless of which party holds office, the market has repeatedly recovered from short-term disruptions. This resilience is due to and driven by the underlying strength of the companies that make up the market. These companies are driven by earnings and the goal to make a profit. That being the case, they constantly adapt to changing regulations and trends and grow through innovation and response to consumer demand. During the Great Depression, World War II, the 2007-2008 financial crisis, COVID, and countless other significant political and economic events, the market’s initial response is almost always a sharp downturn. Yet, each time, once the crisis is quantified and sufficiently ‘priced-in’, it has bounced back and continued its upward trajectory. This long-term growth is a testament to the strength and adaptability of capitalism and the companies that drive our economy and the market.
As advisors, a big part of our job is to help clients maintain a long-term perspective and avoid knee-jerk reactions to current events. Trying to time the market based on election outcomes is generally a losing strategy. Instead, we sharpen our focus on building diversified portfolios that can weather short-term volatility while capitalizing on long-term growth opportunities. Our investment philosophy is grounded in fundamental principles and probabilities, not reactions to headlines or speculation. We believe that the best way to achieve financial goals lies in staying the course and adhering to a well-thought-out financial plan.
While it’s natural to feel concerned about the potential impact of political changes, history teaches us that the great companies of the world in which we invest always find a way to rise above the challenges with which they are presented. If they don’t, somebody else does. Either way, the market and economy continue onward and upward. By focusing on the long term and staying disciplined in our approach, we can navigate the uncertainty and continue to build a prosperous future.