On the second Tuesday in November, Americans will head to the polls to elect the next president of the United States. While the outcome is unknown, no doubt there will be a steady stream of opinions from pundits and prognosticators about how the election will impact the stock market. Investors would be well‑served to avoid the temptation to make significant changes to a long‑term investment plan based upon these sorts of predictions.
Predictions about presidential elections and the stock market often focus on which party or candidate will be better for the market over the long run. Historical market results (see Exhibit 1) show the market has provided substantial returns regardless of who controlled the executive branch. While returns have been better under Democratic presidents, there is no conclusive statistical evidence that the president’s party has an impact on stock market returns. The market is a complex and adaptive system where cause and effect are not easy to link.
A Fortune magazine survey, which was sent to all Fortune 500 CEOs, asked which candidate – Trump or Clinton – they would favor most as next President of the United States. “Of those who answered, 58% said Clinton; 42% said Trump. Big company CEOs tend to lean heavily Republican. But most of the 500 operate on a global scale, and many disagree with Trump’s proposals for raising trade barriers and his stance on immigration.”
SHORT TERM IMPLICATIONS
Trying to outguess the market – especially for shorter-term price movements – is most often a losing game. Current market prices offer an up-to-the-minute snapshot of the aggregate expectations of market participants. This includes expectations about the outcome and impact of elections.
While unanticipated future events — surprises relative to current expectations — may trigger price changes in the future, these surprises cannot be known by investors today. Thus, it is mere speculation in attempting to predict what will happen to the stock market after a presidential election.Plus, looking at the historical record, election month stock returns were well within the typical range of market returns, regardless of which party won the election.
Equity markets can help investors grow their assets, but investing is a long-term endeavor. Making investment decisions based upon the outcome of presidential elections is unwise, and this election cycle is no different. At best, any positive outcome will likely be the result of random luck. At worst, it can lead to costly mistakes. Accordingly, there is a strong case for investors to rely on patience and portfolio structure rather than trying to outguess the market in order to pursue investment returns.
Kevin Kroskey, CFP®, MBA is President of True Wealth Design, an independent investment advisory and financial planning firm that assists individuals and families with their overall wealth management, including retirement planning, tax planning and investment management needs.