The Election and the Stock Market

Every four years, the most frequent question I hear is: “How will the election affect the stock market?” My shortened and profound answer: “I don’t know.” How’s that for side-stepping a question during a hot political season?

Many factors play into the performance of the investment markets. To pare its direction down to the results of the United States presidential election is limiting. Any historical evidence of one party’s victory determining investment success is murky at best. For example, since World War II, the U.S. Stock Market has performed marginally better under a Democratic President. However, if you look closer at the detail, that outperformance has primarily been when aligned with a split or Republican-controlled congress. Republican control of both the White House and Congress has been the best performing combination according to Bloomberg and Goldman Sachs. But keep in mind that our next President will only be the twentieth person to take office since Theodore Roosevelt took over for the assassinated William McKinley in 1901. That’s an extremely small sample size from which to determine an investment strategy. Therefore, neither of the outcomes above should be thought of as any kind of investment panacea.

An election’s emotional pull, constant news coverage, and campaign jabber might lead you to believe that it must have an effect on the financial world. It is true that in the short-term, markets don’t like uncertainty and they do react to possibilities of change — elections can bring both. Elections are a factor but they do not bring a consistent, causal result in the near-term.

Famous investor Benjamin Graham said, “In the short run, the market is a voting machine but in the long run, it is a weighing machine.” Don’t confuse the short and long-term. If your candidate doesn’t win, the other half of the country is happy. Both halves participate in the economy the day after the election. The policies of a President, if enacted at all, can take years to take shape to have a true effect on the economy. The bottom line: don’t feel left behind if you stick to your investment plan despite the hysteria of the election. It’s often the best thing you can do. Here are a few clarifying points to consider:

Beware of all or nothing changes. If you strongly feel a need to make a change, consider minor adjustments that tilt your strategy one way or another but be cautious of allowing emotion to alter your plan drastically. All or nothing changes can often have a devastating effect if you’re wrong.

Enlist professional help. A Certified Financial Planner™ can help formulate these investment decisions in the context of a plan that is unique to you and emphasizes an objective investment plan. This might include utilizing investment managers that have flexibility to navigate today’s uncertainties with those “tilts” I previously mentioned.

Diversification is still key. Ecclesiastes 11:2 says, “Divide your portion to seven, or even to eight, for you do not know what misfortune may occur on the earth.”

No one can know the future, but you can know that you have more influence on your own financial future than the next President! Make the best decisions you can with the knowledge you have today based on solid principles…

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