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.”