Election and Stock Market: Elections and Your Finances

October 25, 2024

With a crucial presidential election just a few weeks away, you may be wondering how your investments are going to be impacted – whatever the outcome. There is certainly a relationship between elections and the stock market, but it is important to have a good, well-rounded perspective on that relationship. The link is primarily a function of investors’ emotional responses to the election and the issues surrounding it, as opposed to any empirical connection between a president’s actual performance or policies and the stock market’s many economic variables. With this in mind, what do you need to know about the link between the elections and the stock market, and how should this guide your investment decisions in the upcoming months?

First of all, there is no doubt that elections have an effect on the stock market, but how significant and long-lasting are these effects? Research shows that the link between elections and the markets generally results from the knee-jerk reactions of investors, and does not reflect any deep or lasting developments in the world’s political and economic spheres. According to this article from U.S. Bank, research into elections over the past 75 years has shown that elections have a “minimal impact on financial market performance in the medium to long term, based on potential election outcomes.” Market returns are primarily driven by economic considerations and inflation trends, rather than election results.

Nonetheless, some investors still make far-reaching decisions in election years, and their decisions are primarily driven by their opinions of the candidates, the parties, and their policies (or at least, perceptions of their policies). If the research of US Bank strategists is accurate, the actual outcomes of elections tend to lead to only very small variances in stock market performance. For example, since 1948, elections that have resulted in single-party control of both the White House and Congress have yielded changes in average three-month returns that would be described as statistically insignificant. The results are somewhat more significant when there is a split between the White House and Congress – but not by much.

A lot can happen in four years, as any former president can confirm. Stock markets will always experience fluctuations over a long enough period, and the nature of those movements cannot necessarily be predicted on the strength of a single variable such as who is incumbent in the White House. Some presidents have had relatively stable terms, but this is not the norm. Almost every presidential term will experience some unexpected event, such as war, a depression, or a pandemic, which is bound to have an effect on the administration’s success, as well as the performance of the stock market. However, these events have little or nothing to do with the president in question. They are external developments that any president could potentially face. Therefore, when studying the stock market during any president’s term, one cannot draw any conclusions based solely on the president. It follows then that one should not make any investment decisions during an election year, based only on predictions of which candidate will win.

Referring back to the US Bank research and similar articles, such as this one from US News, we can see there does not seem to be any clear connection between the outcome of an election and stock market performance in the medium to long term. There are short-term fluctuations, but these are a result primarily of political sentiment, and the market then tends to stabilize as time goes on. While the outcomes of elections may have a significant effect on markets in less stable democracies, they are less important here in the United States.

As the elections approach, it is best to avoid any impulsive actions. Instead, take these proactive steps, keeping your long-term financial goals in mind:

• Resolve to ignore the headlines and the electioneering and stay focused on your personal investment goals.
• Use the opportunities presented by election uncertainty to relook at your portfolio and add some quality investments or diversify.
• Tax strategies should be a central part of your financial planning, regardless of which candidate wins. This is because neither candidate has said much about tackling the fiscal deficit, meaning the government will have to raise funds somewhere. As a result, taxes are likely to increase either way. Get a tax professional on your side now.
• Consider alternative investments and equities as you look for ways to enrich and diversify your portfolio, as these are less susceptible to shifts in the market.
• Work with a Family CFO to help you make the best investment decisions in the lead-up to, and aftermath of the elections.

Contact us if you would like to find out more about the benefits of having one of our dedicated family CFOs help you plan your investments based on the interactions of election and the stock market, together with all the investment advice you need to grow and protect your wealth.

*Disclaimer:

This article is provided by McAdam LLC (“McAdam” or the “Firm”) for informational purposes only. Investing involves the risk of loss and investors should be prepared to bear potential losses. Past performance may not be indicative of future results and may have been impacted by events and economic conditions that will not prevail in the future. No portion of this article is to be construed as a solicitation to buy or sell a security or the provision of personalized investment, tax, or legal advice. Certain information contained in this report is derived from sources that McAdam believes to be reliable; however, the Firm does not guarantee the accuracy or timeliness of such information and assumes no liability for any resulting damages.

This article is the sole opinion of this individual and is not indicative of the firm’s beliefs.