Stocks are the true independents in this election

From

Rich Weiss

Key points:

  • Presidential elections often lead to volatility in the markets. But “betting” on a political outcome is difficult and potentially costly
  • Markets historically go up no matter which political party wins a presidential election, so it typically pays not to try to time the election but stay invested for the long term instead
  • We believe taking a balanced approach is best. Stick to your saving and investing plan despite the short-term volatility that political, economic and market conditions may bring.

The timing of this year’s presidential election feels momentous. We are amid a global pandemic and social protests in the U.S. The selection of a certain candidate or political party can result in significant changes to economic, social and environmental policies that affect particular industries or market sectors.

But our research shows election results don’t drive financial market outcomes over time, so it doesn’t pay to try to time your investments around elections. We believe your own saving and investing behaviour should drive your financial success—which includes developing and sticking to a long-term plan.

The political party controlling 1600 Pennsylvania Ave. isn’t likely to affect your retirement needs or the amount of money you’re saving for a down payment on a home. The levers you can pull to improve your chances of enjoying a fully funded retirement or financing a college education exist independently of the party in office.

The volatility is real

We understand the anxiety you may be feeling as we approach the election. It’s natural, and it’s real. Market volatility typically increases near the time of the Democratic and Republican party national conventions through Election Day. But this volatility has historically subsided just as quickly after the election.

If we widen our lens to look at market volatility in the years before and after presidential elections, we find that volatility stayed in the same general range. If electoral outcomes had huge impacts on markets, we would expect to see some big divergence or changes. We just don’t see evidence that electoral outcomes move markets.

But don’t bet on taking advantage of historical trends

Some investors might conclude they could gain something by trading out of markets around elections and getting back in later. Our analysis shows, however, that it may be best to simply stick to your knitting and not jump in and out of the market.

Markets historically go up more often than they go down over time. And because market gains often come in short, sharp jumps, being out of the market when these jumps occur could seriously affect your long-term returns. That’s why the best result is staying invested, while the worst result is staying out of the market for the longest period. Trading in or out around the election produces outcomes between the two extremes.

The likely drivers of returns in the short run are independent

The U.S. Federal Reserve has a significant effect on financial market returns and operates independently of electoral outcomes. It’s no coincidence that recovery from the February-March bear market began March 24, the day after the Fed announced extraordinary measures to support the economy and financial markets.

COVID-19 also remains a large source of market uncertainty, and the disease operates independently of electoral outcomes. Economic fundamentals drive market performance over time, not elections or the party in power. Whether we have a V-, U- or W-shaped recovery is likely to have a greater impact on financial returns than who occupies the White House.

So, what should I do about the Election?

The analysis we’ve seen suggests that investors who do best over the long haul stick to their plans and stay diversified, not try to time the market by trading in and out of asset classes.

Betting on politics is hard and potentially costly even if you pick the winning candidate or political party. You must not only correctly predict the winning candidate, you must also time trades perfectly and correctly foresee the winning candidate’s effect on the markets. Don’t let election predictions or results impact your investment choices. We believe successful long-term investing relies on developing and sticking to your financial plan.

By Rich Weiss, CIO, multi-asset strategies

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