With Election Day almost (finally!) here, the most common worry I hear from many of my clients is, “How will the presidential election affect the markets?”
Market volatility before and after the election is a legitimate concern. For sure, this hasn’t been a typical election, and a victory for either party could affect the markets. Markets tend to react to good news and bad news. In the short-term, the stock market can be emotional and illogical. That’s because people drive markets and people– especially when investing their money–can be emotional and illogical.
Dimensional Fund Advisors (DFA) recently published a new study, “Presidential Elections and the Stock Market,” and included the following exhibit of the growth of a dollar invested in the S&P 500* over nine decades (since 1926) and 15 presidencies (from Coolidge to Obama). The study examined the growth of one dollar from 1926 through the end of June 2016. The outcome shows that through Democratic and Republican administrations, the stock market consistently grew, regardless of which party was in power. At times, though, the market was down or flat, too.
The other part of the study delved into shorter periods of returns previous and subsequent to presidential elections. Again the data showed there to be little or no differences compared to market returns of non-presidential election years. The takeaway: Trying to make an investment decision based on the outcome of an election was unlikely to generate any excess return for an investor. Any positive outcome based on using such a strategy is likely to be the result of random luck. At worst, it can lead to costly mistakes. We can’t predict the economy, and we for sure can’t outguess the markets.
You may be thinking, however, that this time is different. No doubt, with a 24/7 news cycle and nonstop election coverage, it’s easy to get on the roller coaster with the Wall Street hype and media pundits. Turn off your television sets and don’t panic. If history is any guide (and in my opinion, it’s the only guide we have), the outcome of this election should have little impact on the markets in the long-term.
*The S&P 500 Index is an index of 500 of the largest exchange-traded stocks in the US from a broad range of industries whose collective performance mirrors the overall stock market. Investors cannot invest directly in an index.
Disclosure: This information is provided for educational purposes only and should not be considered investment advice or a solicitation to buy or sell this security. This blog contains general information that is not suitable for everyone. The information contained herein should not be construed as personalized investment advice. Information was based on sources we deem to be reliable, but we make no representations as to its accuracy. Past performance is no guarantee of future results. There is no guarantee that the views and opinions expressed in this article will come to pass. Investing in the stock market involves gains and losses and may not be suitable for all investors. Information presented herein is subject to change without notice and should not be considered as a solicitation to buy or sell any security.
To learn more about Jeffrey Bogart, view his Paladin Registry research report.