As the United States gears up for another presidential election, the nation is not only contemplating the future of its governance but also the potential impact on its financial markets.
The relationship between presidential elections and the stock market has long been a subject of interest and debate among economists, analysts, and investors. While it’s tempting to draw direct correlations, the reality is far more nuanced, with various factors at play.
Sectors Impacted Differently
The two major party candidates typically have very different agendas when it comes to issues like taxes, regulation, trade, spending priorities, and more. Depending on who wins, this can signal potential major policy shifts that will impact different industries. For example, if a Democratic president gets elected, stocks of renewable energy companies may rise in anticipation of greener policies, while fossil fuel companies could fall. A Republican president might boost the stocks of oil/gas companies and industries that favor deregulation. Policies aimed at making college more affordable could negatively impact for-profit education companies. It’s im-mensely important for the public, especially advisors, to stay informed when looking at the impact a Presidential Candidate can make on the market. Keep abreast of election-related developments, including proposed policies and potential market impacts. Understanding how different outcomes could affect various sectors will enable one to make levelheaded decisions economically.
Historically, presidential election years have often been accompanied by heightened market volatility. Uncertainty surrounding policy changes, shifts in regulatory environments, and potential alterations to fiscal and monetary policies can lead to fluctuations in investor sentiment. However, the impact of elections on the stock market is not uniform. The market’s response can vary depending on a multitude of factors, including the prevailing economic conditions, geopolitical events, and the candidates’ proposed policies.
Elections do have consequences. But if the past century is any guide, the long-term consequences of US presidential election years on investor portfolios, including 401(k)s, is minimal at best.
According to CNN, in a recent study conducted by retirement planning firm TIAA, the performance of a moderate-risk portfolio consisting of 60% stocks and 40% bonds was examined across all presidential election years dating back to 1928. Surprisingly, only four years experienced negative returns: 1932 (with a decrease of 1.4%); 1940 (with a decrease of 4.7%); 2000 (with a decrease of 0.8%); and 2008 (with a significant decrease of 20.1%). Unsurprisingly, those four presidential election years occurred at times of seismic events: The Great Depression. World War II. The implosion of the tech bubble. And the housing and financial crisis that created the Great Recession¹
“Over a very long period of time, it washes out,” says Niladri Mukherjee, chief investment officer at TIAA.
Advisors should proactively reach out to clients during a presidential election year to address any concerns they may have about the potential impact on their investments. Heightened market volatility is normal in the months leading up to and immediately after the election as uncertainty increases. Counseling clients to expect turbulence and resist emotional reactions to short-term swings is critical. Reinforce the importance of sticking to their long-term strategies and diversified portfolios. Clients will need their advisors to be a trusted voice of reason and expertise. This helps avoid rash, panicked decisions. Put the circus of campaigning in perspective and reiterate each client’s personalized investment plan. Advisors are there to prevent knee-jerk reactions to transitory market fluctuations during the election cycle. Their role is to be a stable, rational ally focused on helping clients stay disciplined to achieve their long-term financial goals, regardless of the short-term political noise.
While the stock market’s short-term movements around presidential elections can be dramatic at times, individual investors should avoid making decisions based solely on those short-term fluctuations. Maintaining a balanced, diversified portfolio matched to individual risk tolerance and time horizon is the wisest approach through the inevitable policy shifts and market cycles that will come with any administration. In short, the stock market reflects the economy’s overall health, remaining strong despite political changes during elections.
¹It’s a presidential election year. Here’s what that could mean for your 401(k). (New York CNN, Jeanne Sahadi, May 7, 2024)
Content is created in full or part by Claude at the request of David B. Wentz, J.D., LUTCF . David B. Wentz offers products and services using the following business names: Tax Favored Benefits, Inc. – insurance and financial services | Ameritas Investment Company, LLC (AIC), Member FINRA/SIPC – securities and investments | TFB Advisors, LLC or Ameritas Advisory Services (AAS) – investment advisory services. AIC and AAS are not affiliated with Tax Favored Benefits, Inc. or TFB Advisors, LLC
DAVID WENTZ is CEO of TFB, Inc. David frequently speaks at various seminars about profit sharing, 401(k) plans and investment programs. The North American Dealers Association (NAEDA) endorses Tax Favored Benefits as a 401(k) provider. No compensation is received. More information is available at www.taxfavoredbenefits.com.
