How Will the Markets React to the Election?


ReShelle Barrett, CFP®

I tend to get the question “How will the market react if so-and-so wins” often in presidential election years. If I had a crystal ball (and I have one on my desk but it actually only looks pretty), I would be able to answer that question. Even with historical statistics, no one knows how the markets will perform regardless of what they tell you or what they’re selling. Historically, the numbers indicate that the market tends to perform in positive territory (see table below) in presidential election years. The reality is that is more likely based on fundamental economic data and corporate dynamics rather than the political environment of the time.

So to answer the question, I like to use some familiar names as examples when I’m asked about market timing. Although we all may have strong opinions about how the country and world will react if/when so-and-so gets elected but ask yourself – will you drink less soda on November 9th if a republican gets elected? Will you turn your lights on less if a Democrat gets elected? Will you use less toilet paper? Will you still take your medications? Will you still repair your car when it doesn’t pass inspection? Will you still get up and go to work the next day? If you answer “yes” to any of these questions, then you should get the point. It’s much more important to understand the fundamentals of corporate balance sheets rather than focus on a specific event.

What we do know with a fair amount of certainty is that the market does not like uncertainty. This means we may see increased volatility over the next few months at least until after the election. A recent example that’s likely still fresh at least in my mind is Brexit. The global markets sold off as a reaction to the uncertainty and surprise of the vote but in the end (in this case literally one week) rationale would win out and the markets would stabilize. It is possible to see investors putting money into sectors that are likely to see increased spending over the next few years while less investor dollars going to sectors that are likely to see increased regulation. However, over the long run investors will make money regardless of who the next president of the United States will be.

We also know with a fair amount of certainty that roughly 50% of us are going to happy on November 8th and 50% of us are going to be extremely disappointed. So one way or another we all have to live with the outcome…unless of course you choose to relocate to another country!

So what I’ve found in the six going on seven election cycles I’ve been advising clients is that the future is always uncertain and the results of any election should not change your long-term investment strategy. Sound financial planning is the same today as it was 50 years ago, as it will be November 9th and as it is likely to be in 50 years from now. The same basic fundamentals still apply. Spend less than you earn, save as much as you can, use debt wisely, and consider time not timing when investing. Keep your short-term emergency money safe and liquid and invest your long-term monies in diversified, well balanced growth investments.

So rather than sit and watch the pundits and even the candidates for that matter and worry about the outcome, get out and vote…and leave your investment strategy alone!

 Returns in Presidential Election Years
Year Return Candidates
1928 43.6% Hoover vs. Smith
1932 -8.2% Roosevelt vs. Hoover
1936 33.9% Roosevelt vs. Landon
1940 -9.8% Roosevelt vs. Willkie
1944 19.7% Roosevelt vs. Dewey
1948 5.5% Truman vs. Dewey
1952 18.4% Eisenhower vs. Stevenson
1956 6.6% Eisenhower vs. Stevenson
1960 .50% Kennedy vs. Nixon
1964 16.5% Johnson vs. Goldwater
1968 11.1% Nixon vs. Humphrey
1972 19.0% Nixon vs. McGovern
1976 23.8% Carter vs. Ford
1980 32.4% Reagan vs. Carter
1984 6.3% Reagan vs. Mondale
1988 16.8% Bush vs. Dukakis
1992 7.6% Clinton vs. Bush
1996 23% Clinton vs. Dole
2000 -9.1% Bush vs. Gore
2004 10.9% Bush vs. Kerry
2008 -37% Obama vs. McCain
2012 16% Obama vs. Romney
2016 ? ?

Table Shows S&P 500 Market Returns for Each Election Year Since 1928
Data is from Dimensional Funds Matrix Book.

ReShelle L. Barrett, CFP®

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