By STEPHEN P. HIGH, CPA, JD, PFS
Speculation about the impact of the 2016 presidential election was running rampant in the press and among pundits from both sides of the aisle right up until the election. Now both Republicans and Democrats are taking credit for the recent uptick in the stock market. Republicans suggest that the bullish market is a result of optimism and excitement about the new president and Republican-controlled Congress, while Democrats argue that the improved economy and stock market (two different things) are the result of the previous administration’s eight years at the helm.
While it’s really no surprise that politicians and the financial media are debating how the outcome of the recent elections will affect markets, it is surprising how little attention has been paid to the reality of the situation (when considering the facts).
While there is some evidence that markets tend to be weaker during election years1 –perhaps because of the uncertainty that precedes the election – markets have also tended to bounce back following the election, regardless of the winning party. How the S&P 500 performs in election years versus non-election years, in the final year of a presidential term, or even in election years when no incumbent is running might make for interesting cocktail conversation … but none of these factors should matter to your investment plan, which is based on your individual circumstances and customized to meet your financial goals.
Market “gurus” and pundits had plenty of predictions leading up to this election about its impact on the markets or the economy as a whole. Mark Cuban told CNN “with 100 percent certainty” there would be a “huge, huge correction” if Donald Trump was elected.2 Bill Maher predicted a Trump victory would “crash the stock market.”3 One writer charged that Hillary Clinton would be “bad for stocks and the economy.”4 Another headline promised that one of Clinton’s plans would “ruin the U.S. economy.”5
While political headlines might affect the financial markets in the short term, no one can accurately predict what the long-term effects of the election will be. What we do predict, however, is that markets will move up and down over longer periods of time; the “headline du jour” is unlikely to have any long-term impact.
We have experienced both up markets and down markets under both Democrat and Republican administrations. It is interesting to note that research6 has shown that people tend to feel more confident in the economy and the markets when the political party they favor is in power (and vice versa).
Remember — even though we now know the result of the election, when it comes to predicting market performance, no one … repeat: “no one” … knows what will happen. So don’t listen to the financial media noise, and don’t get too excited (or too disappointed) about the outcome of the election. You’re better off if you don’t let emotions or politics interfere with your investing behavior.
If you have an investment plan that that was custom-designed to fit your unique circumstances, time horizon, and goals, stick with it. Don’t let brokers or other financial advisors convince you that election results necessitate buying and selling to take advantage of market conditions and predictions. An overwhelming amount of objectively vetted academic evidence demonstrates that a stay-the-course, long-term approach is the most sound way to invest.
Elections are important — but not as part of your investment strategy.
3 Washington Examiner
5 Investor’s Business Daily
6 Social Science Research Network