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The Election and Your Money: How Do Presidential Elections Affect Financial Markets?

Investors are always dealing with a degree of uncertainty, but the upcoming Presidential election  has increased the level of uncertainty and volatility considerably. This has many investors feeling  wary about the future, regardless of their political affiliation. 

But all of this anxiety could be for naught. While many investors believe that Presidential  elections are market-moving events, the data doesn’t necessarily support this conclusion. 

A Nominal Effect 

The fact is, Presidential elections have a nominal effect on the movement of financial markets.  “They’re essentially a non-event,” says CooksonPeirce President Cory Krebs. 

Interestingly, which league’s team wins the World Series is actually a better predictor of stock  market performance than whether there’s a Republican or a Democrat in the White House. (In  case you’re wondering, the Dow Jones Industrial Average has increased an average of 8.4%  during the year following a National League team’s victory but only 2.5% during the year  following an American League team’s victory.) 

Of course, there are winners and losers when it comes to industries and sectors that will benefit  or be harmed by a Presidential administration’s policies. However, it’s hard to ascertain this and  it’s not always something you can position yourself out in front of as an investor.  

“Building an investment process around an unexpected outlier event like an election is incredibly  challenging,” says CooksonPeirce Regional Managing Director Janelle Fumerola. “Also, there’s  usually a long lag between when an administration’s policies are implemented and when the  effects are felt.” 

Emotions vs. Policy 

Elections are often more about emotion than they are policy. “Fear of the unknown tends to drive  a lot of emotional investing decisions that are made during election seasons,” says Krebs. However, research indicates that making these kinds of short-term emotional decisions leads to  less wealth accumulation over the long term. 

Since Presidential elections only occur once every four years, drawing conclusions from them  can be especially challenging. Also, the effects of a Presidential election are usually short-term in  nature and unless there’s a major surprise, the outcome doesn’t drastically impact the financial  markets. 

The data bears this out. For example, between 1948 and 2017, the average returns of the S&P  500 during the two months immediately following the election (November and December) were  3.6% when a Republican was elected and 1.9% when a Democrat was elected. But during the  full year following the election, the average returns were 19.8% when a Democrat was elected  and just 3.9% when a Republican was elected. 

One potential development worth watching this year is the possibility of contested election. This  would add even more uncertainty if we don’t know who the President will be for several weeks, 

or possibly even longer, after election day. “A scenario like this could have short-term market  ramifications, such as increased volatility,” says Krebs. 

Don’t Expect Drastic Changes  

Whoever wins the Presidency this year will face a deep recession, high unemployment and an  ongoing pandemic. As a result, it will probably be difficult for the President to make drastic  changes anytime soon. 

Krebs notes that businesses quickly adapt to the new rules of engagement depending on who the  President is. “Earnings and productivity are what drive stock prices over the long term and no  Presidential election is going to change that,” he says. 

The current market volatility caused by election uncertainty could represent a good opportunity  for investors sitting on the sidelines with cash to get into the market. “Just don’t try to time your  entry and exit,” says Fumerola. “This is difficult, if not impossible, to do on a consistent basis.”

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