Investors may be understandably apprehensive that the ups and downs of this election year could have eventual impacts on the market.
But the emotional news-cycle rollercoaster of election years has often had less impact on markets than voters might assume, and history shows the challenges of trying to make investment decisions timed to an election year.
Here are 4 takeaways for investors looking to navigate their portfolios through this year's election cycle—and beyond.
1. Historically, US markets have generally risen in election years.
Since 1950, US stocks have averaged returns of 9.1% in election years, according to research by Fidelity’s Denise Chisholm, director of quantitative market strategy.
Of course, it’s important to bear in mind that US stocks have historically risen over the long term, so it’s not surprising to see an upward trend in the data.
"Looking at the historical data, it appears that while the 12 months preceding a presidential election have had the widest range of possible market outcomes relative to other parts of the election cycle, the average return isn't substantially better or worse. This points to the presidential election not being a notably 'market-moving' event," Chisholm says. “The election cycle is usually not the dominant theme of the market.”
Some investors or voters may wonder if this upward trend is due to the party in power trying to “juice” the economy and markets right before an election. But the historical data doesn’t support this notion, says Anu Gaggar, vice president of capital markets strategy at Fidelity, particularly when looking at developed markets with strong institutions and an independent central bank, such as the US.
“Politically driven economic cycles are more relevant to emerging-market economies or economies with weaker institutions,” says Gaggar. “They’re not as relevant for developed markets like the US.”
2. Betting on specific policy or sector impacts can be highly risky.
While it’s possible to anticipate potential policy impacts at a very high level, the reality is that at this stage no one can predict with any certainty what sectors, industries, or stocks may benefit from the next administration’s policies.
Gaggar notes that this unpredictability is backed up by the historical data on sector performance. “There are very few consistent patterns of relative sector returns in election years,” she says, which makes placing sector bets around partisan outcomes very risky.
Naveen Malwal, institutional portfolio manager with Strategic Advisers, LLC, the investment manager for many of Fidelity’s managed accounts, warns in particular against making investment decisions based on campaign-trail promises.
"There are dramatic differences between the proposals expressed on the campaign trail and the actual policy changes that take place once the candidate is in office," says Malwal. "It's exceedingly rare that a candidate will be able to deliver on exactly what they've proposed once they take office. If you're making investment decisions based on such proposals, that could be a risky way of managing one's money."
3. Markets are nonpartisan.
Although popular myths sometimes suggest that one party or the other is “better” for market returns, the historical data does not bear out these theories.
“Markets are nonpartisan,” says Gaggar, “so it’s very important not to base your investment strategy on the outcome of elections.”
The S&P 500 has historically averaged positive returns under nearly every partisan combination, as the chart below shows.
“Historically,” says Malwal, “there hasn't been a strong relationship between Election Day outcomes and how markets perform from there on out. As a result, Strategic Advisers doesn't adjust our positioning based solely on election outcomes.”
4. Investors should focus on fundamentals and stick with their plans.
It can be tempting to put your money where your convictions are—whether you feel optimistic or pessimistic about this year's election.
Historically, however, financial markets have largely been unbothered by both presidential and midterm elections, and trying to adjust your investment strategy in the hopes of capitalizing on an anticipated post-election swing in the markets could end up backfiring on you. “If you’re an investor, I would suggest that this shouldn’t be something you focus on,” says Chisholm.
Market moves are more likely to be driven by market and economic fundamentals, such as corporate earnings, interest rates, and other economic factors. "While political headlines may at times cause short-term ripples in the market, long-term, for stocks, bonds, and other investments, returns seem to be driven much more by the fundamentals of the underlying asset classes," says Malwal. As such, Strategic Advisers, LLC, is more focused on economic fundamentals, such as the stage of the US business cycle, the level and direction of interest rates, the job market, and business activity.
And rather than trying to predict near-term political or market cycles, most investors would be better served by adopting a thoughtful long-term financial plan that’s suited to their needs, and sticking with it. "We believe such a plan should be based on an investor's goals, their risk tolerance, and other considerations regarding their specific situation as an investor or as a family,” says Malwal. “But we don't believe market history supports factoring in election cycles when managing long-term investments."
Or as Jurrien Timmer, Fidelity’s director of global macro, puts it, “Elections tend to have less impact on the markets than politicians may like to believe.”