How much do elections impact the stock market and portfolio returns? Should elections even matter to long-term investors in the first place? These are the questions investors and financial professionals are facing as we approach November 5.
To provide answers, Capital Group has analyzed more than 90 years of market and election data and identified five ways that elections influence stock returns and investor behavior.
1. Markets have trended higher regardless of which party wins the election
Politics can bring out strong emotions and biases, but investors would be wise to tune out the noise and focus on the long term. That’s because elections have, historically speaking, made almost no difference when it comes to long-term investment returns.
2. Gridlock or sweep? Equities have gone up either way
The presidential election isn’t the only one to watch. The results of key legislative races could determine whether either party controls both chambers of Congress, making it easier to fulfill their policy agenda. Investors often fear such “red wave” or “blue wave” scenarios, but assuming such an outcome will lead to meaningfully lower stock prices oversimplifies the complexities of stock markets.
3. Markets have tended to predict election results
A simple stock market metric has correctly predicted the winner in 20 of the last 24 presidential elections since 1936 — a track record that might make even the top pollsters jealous. If the S&P 500 Index is up in the three months prior to Election Day, the incumbent party usually wins. If markets are down during that period, the opposing party typically claims victory.
4. Investors often become more conservative in election years
It can be tough to avoid the negative messaging around election coverage. And it’s natural to allow the rhetoric of political campaigns to make us emotional. History has shown that elections have had a clear impact on investor behavior, but it’s important that investors don’t allow pessimism to steer them from their long-term investment plans.
5. Moving to cash in election years can reduce long-term portfolio returns
What has been the best way to invest in election years? It isn’t by sitting on the sidelines.
Ready to review your investment and financial goals? Reach out and let us help you pursue your financial and investment goals. Want to read more about investing in an election year? Get your free guide here.
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