We are about a month away from the elections and our office has received several calls in regards to the effect that either candidate will have on the economy and consequently, the stock market.
Most people feel very passionately about this upcoming election. Oddly though, I find that they are not strongly for, but rather ardently against a specific candidate. Regardless of the flaws or characteristics of each nominee - what should we plan for when either of the candidates wins the general election? A look back at history shows that presidential election cycles indeed correlate with stock market return. As for the outcome of elections? The impact might surprise you. Below, are a few things you should consider in election years.
According to a MFS Investment Management research report entitled, “Primaries, caucuses and elections–oh my!,” based on data from Ned Davis Research, from 1900 – 2008, the stock market, as defined by the Dow Jones Industrial Average (DJIA), performed better when the incumbent party won each given election, regardless of the political party of the incumbent. Though historically, according to this research, market performance has been better historically under Republican Presidents as opposed to Democratic Presidents according to this research.
Perhaps even more important to stock market performance than who is in the Oval Office after the presidential election, is which political party is in control of Congress. To this end, based on the same MFS research report, it appears that on average, the combination of a Democratic President and a Republican Congress has produced the best historical returns from 1961-2010, on average, for the stock market–which is defined in this case by the S&P 500 index.
As you can see from the data above, it may be more important to watch the Senate races in the upcoming elections. With that being said, I believe that either candidate will have a slight impact on the market, but not a long term effect. At times investors can act on emotion (rather than reasonableness) which can cause short term volatility in the markets. It can be a common emotion to not like what is going on in the world or country and feel the need to “go to cash” and not stay invested in the markets. Please remember that it is not uncommon to have an election surrounded by controversy. Looking back through the years, here are some of the tumultuous events and their corresponding surrounding elections1:
Though it is important to recognize historical market trends, such as the ones discussed in this article, I believe that greater emphasis should be placed on accurately defining your specific financial and life goals, income needs, and investment time-frame.
In the meantime, grab some popcorn with your favorite beverage and enjoy the entertainment that will be presented to us over the next month! May the best candidate win!
1 Source: Elections Come and Go, American Funds Distributors Inc., 2016