Investing can be challenging even under normal circumstances. The uncertainty and heightened emotions of a presidential election year can amplify these difficulties. However, the impact of elections might not be as significant as it seems.
By focusing on the long term, investors can set themselves up for growth, regardless of who wins the election. Conversely, succumbing to the ups and downs of market volatility during election cycles can be counterproductive to their investment goals.
Research from Capital Group sheds light on three key takeaways that can help investors navigate the unpredictability of an election year.
The political party that has been better for investors
Many investors wonder if one political party is better for the markets. When it comes to investing, it’s best to ignore the short-term noise and focus on the long-term perspective.
Historically, the political party in power has had little impact on long-term investment returns.
Consider this: a $1,000 investment in the S&P 500 at the beginning of Franklin D. Roosevelt’s presidency would have grown to over $19 million by June 30, 2023, as shown below. This growth occurred under eight Democratic and seven Republican presidents, illustrating that economic and political challenges – no matter how daunting they seem at the time – are nothing new.
Election cycles have always been fraught with controversy and uncertainty, yet the market has demonstrated remarkable resilience. The most successful investors generally focus on staying in the market for the long haul, rather than trying to time their entries and exits.
Key takeaway: History shows that U.S. stocks have consistently risen over time, regardless of the political party controlling the White House.
How elections impact the stock market
Markets are inherently averse to uncertainty, and few events can seem as uncertain as a presidential election. But actually, the stock market fluctuates most during the primaries.
However, this volatility typically doesn’t last long. Once the primaries conclude and each party has chosen its candidate, markets generally resume their upward climb.
History supports the virtue of patience: since 1932, stocks have risen by an average of 11.3% in the 12 months following the end of the primaries (Capital Group uses May 31 as a benchmark), which outpaces the 5.8% average gain during comparable periods in non-election years.
It’s important to remember these figures represent averages and not guarantees.
Again, timing the market is notoriously challenging and often counterproductive. A long-term investment strategy is more effective, helping investors navigate through volatility and capitalize on the general upward trend of the markets, even during election cycles.
Key takeaway: Election year primaries may trigger market volatility, but historically, a strong recovery has followed, underscoring the benefit of a long-term investment focus.
The mistake most investors make during election years
Presidential candidates tend to highlight contentious issues, and their campaigns usually intensify negative sentiments. It’s no surprise, then, that investors might also begin to feel pessimistic, potentially letting their emotions influence their financial decisions.
Capital Group’s historical data reveals a pattern: investors have frequently moved their money into money market funds – considered one of the safest investment options – more often before elections. In contrast, stock funds, including international ones, typically experience the highest net inflows in the year following an election. This behavior indicates a preference for minimizing risk during uncertain electoral periods and a return to riskier assets like stocks once the uncertainty clears.
However, trying to time the market based on election cycles is often not a successful long-term investment strategy and can significantly undermine portfolio returns.
Key takeaway: Investors often shift to safer, cash-like assets during election years due to increased nervousness, but this cautious approach seldom pays off in the long run.
How should you invest in a presidential election year?
The most important step is not to let the noise of election forecasts and outcomes influence your investment decisions. Historical data discussed above shows that election results have a minimal impact on long-term investment returns.
Your investment strategy should be tailored to your personal financial goals, not who occupies the Oval Office.
Therefore, stick to your long-term investment strategy rather than trying to time the market around electoral cycles. Investors who remain invested have historically fared better than those who retreated to cash during election years.
Finally, consider seeking professional guidance. Schedule a free consultation with an Advance Capital Management financial adviser to review your portfolio and help ensure your investments are well-positioned to meet your objectives.
