Elections And The Markets
Brent Woyat - Oct 11, 2016
Every four years, Americans take a few minutes out of their day to choose the next President of the United States. Voting is a simple, uncomplicated act—but the months preceding it are anything but. After all, before the vote, we first have to endure the dreaded “campaign season.” From endless televised debates to the plethora of signs on voters lawns, “politics” becomes the order of the day.
If you’re like me, you’re probably starting to get tired of all the campaigning. But you also know how important the political process is. So we still need to be informed and that means asking some pretty tough questions, like: “Which candidate best represents voters opinions and values?” “How will each candidate affect the U.S. governments standing overseas?” “What will each candidate do to ensure both safety and personal liberties?” Getting the answers can be both frustrating and time-consuming.
Fortunately, there’s one question you don’t have to ask.
“How will the election affect the markets?”
This is a question I get every four years. This year, I thought I’d make life a little easier for you by answering it now. That means you have one less question to worry about! So how does the election affect the markets?
The answer is: Not much...
Since 1833, the Dow Jones Industiral Average has gained an average of almost 6% every presidential election year. That number increases to 9.5% for the S&P 500. Of course, there can be some massive exceptions. For example, in 2008, the Dow sank nearly 34%.
But there’s a danger in using averages to try and predict what will happen. Take the “Presidential Election Cycle Theory” for instance. Once upon a time, many people believed that U.S. stock markets are always the weakest in the year following a presidential election. This was the case for Franklin Roosevelt. It also held true for Truman and Eisenhower. But in George H.W. Bush’s first year, the market rose 25.2%. In Bill Clinton’s? 19.9%. Barack Obama? 15.4%. It’s clear that the Presidential Election Cycle Theory just doesn’t hold water.And that’s true for actual election years as well.
An average merely shows you what has happened, not what’s going to happen. (Side note: this is why you often see the financial industry emphasize that “Past performance does not guarantee future results.” Because it’s true.)
“Okay,” you might be saying, “so there’s no hard and fast rule on how election years affect the markets. But what if the Democrats/Republicans win? Won’t that have an effect?”
My answer:Not really...
As worked up as we often get about our political beliefs, neither party tends to have that much impact on the markets compared to the other. Historically, the Dow has gone up an average of 9% every year a Democrat lives in the White House. With Republican presidents, the number is 6%. The difference is very small, and can be attributed to a whole range of factors, not just politics.
“So you’re saying it doesn’t really matter who ends up getting elected?”
Obviously, it matters a great deal who the president is…but not when it comes to the markets. And that’s a good thing! Here’s why:
- The Founding Fathers created a system of government where no branch (executive, legislative, or judicial) was supposed to dominate the other. The fact that neither political party, nor election years in general, have that much influence on the markets shows that a system of checks and balances extends to investing, too.
- The markets are driven by far more than just one person or event. They’re controlled by the ebb and tide of trade, by the law of supply and demand, by innovation and invention, by international conflict and consumer confidence. The markets are like life. The course our lives take isn’t determined by one gigantic decision, but by the millions of small decisions we make every day. I don’t know about you, but I find that comforting.
“So what’s the takeaway from all this?”
The takeaway is that when it comes to investing, we control our own destinies, not politicians. The way to reaching your financial goals is by having a sound investment strategy, making informed decisions, and taking emotion out of investing. Not by worrying about the election.
So this year, you can watch the debates with great interest but armed with the knowledge that whatever happens, the markets will go their own way…and so will you.