We are reminded this year that elections can be unpredictable. Who could have guessed, for example, that a man so far outside the mainstream of politics as Donald Trump would be the Republican candidate for President? Or that this election would provide so much free advertising for Twitter?
But, for us, one thing can always be relied upon in an election year; people want to know how the vote will affect the stock market and the economy. While there are many opinions – and many studies – on the matter, none has proved able to reliably predict how the market will, in fact, react to election day results.
Democrats, Republicans, Libertarians, Greens and even a few “Bernie or Bust-ers” all hope to see gains this year – but the truth is that no matter who wins, any impact on the market will likely be short term. And that is something we can see by reviewing the last 100 years of data.
Using election cycle data from 1900 through 2012, Ned Davis Research yields a chart clearly showing the real – but limited – impact that our Democratic process has on financial markets. Presidential elections do cause swings, particularly in their final weeks. When incumbent parties lose, these swings are biggest. But post-election markets tend to rally by year’s end.
It’s worth understanding how people feel about the election. But we encourage you to remember that there are many more factors affecting markets than our presidential election. Over a full market cycle, success is determined by fundamentals, not by shifts in sentiment, short term momentum or campaign rhetoric.
We tend to avoid making sudden moves into or out of markets based on headlines or what Donald Trump says on Twitter. Instead, we try to assess a variety of scenarios, then construct a diversity of portfolios designed to meet longer-term goals while minimizing short term risks. However, it is always interesting to keep abreast of how financial writers are spinning this years (very unique) election.
Despite the relatively predictable long-term data analysis above, there are many articles opining on how one outcome or another will swing markets. It seems that for every article declaring that Republican victories are good for business, another finds data to support the opposite. Some writers claim that markets are barely affected by political factors, while others fret that if we make the “wrong” choice, stocks will surely plummet.
Google “election year stock market” and you can feast on starkly contrasting opinions, wildly varying theories, the latest studies and a host of contradictory expert opinions. To save you some time, we have collected a few examples of the kinds of arguments we commonly encounter in an election year. We hope you enjoy these contrary viewpoints – and then ignore them completely.
Democrats are good for the market:
Republicans are good for the economy:
It makes no difference:
It’s Impossible To Know: