Four myths debunked: Investing in an election year

With the U.S. presidential election making headlines, it’s easy to feel uncertain about your investment strategy. As the political rhetoric and election promises heat up, we think it’s essential to keep your emotions in check and ignore the common misconceptions about how elections affect the economy and the markets.

Here are our top four myths about ways this year’s election could impact your portfolio:

Myth #1: The U.S. economy does better under a specific party

Reality: Economic growth is influenced by many factors, including global economic conditions, technological advancements and demographic changes, not the political party in power.

We looked at gross domestic product (GDP) growth rate by year going back to 1980. Figure 1 shows that economic growth has historically been similar under each party. While different parties may prioritize various economic policies, the overall growth trajectory of the economy is shaped by long-term trends and structural factors that transcend political cycles. Therefore, attributing economic success solely to the party in power oversimplifies the complex dynamics that drive economic growth.

Myth #2: The stock market is too risky during election years

Reality: Stocks have historically fared well in election years, generating, on average, high-single-digit returns.

Over the long term, election-year performance is no better or worse than any other one-year period. Figure 2 shows that in most election years, stocks have performed well. The only times the U.S. stock market fell during an election year were because of unprecedented economic events:

• 1932: The stock market crashed in 1929, resulting in the Great Depression.
• 1940: The lingering impact of the Great Depression and the first full year of World War II negatively affected markets.
• 2000: The dot-com bubble burst, dragging down technology-related stocks and impacting the entire market.
• 2008: The global financial crisis affected stock markets globally, not just in the U.S.

In each of these years, the U.S. economy faced significant recessionary conditions that coincided with an election. But even in these extreme cases, the stock market rebounded over time.

Myth #3: Some sectors will benefit depending on who wins the White House

Reality: Campaign promises don’t always become policy because the new president must navigate congressional approvals, opposition and setbacks.

Every election season, each party focuses on hot-button policies that drive voter support, from defence spending and taxes to clean energy and health care. However, turning a campaign promise into policy is challenging, with negotiations and Congress often derailing a president’s agenda.

If a policy does make it through, specific sectors may get a slight, temporary boost. Figure 3shows that over time, though, there’s no discernible trend that ties political parties to the fate of a particular sector. That’s why we believe long-term investment strategies should focus on stock fundamentals versus predicting winners and losers based on any candidate’s agenda.

Myth #4: Moving to cash until the race ends is a good idea

Reality: Moving your portfolio into cash could be a costly mistake.

Money markets and other cash equivalents tend to get more traffic during an election year because investors perceive these instruments as lower risk in times of uncertainty. If you’re anxious about the election, moving to less risky assets may seem safer, but you may miss out on long-term returns.

Our analysis shows, however, that it’s best to maintain a consistent approach by staying focused on your investment goals and not jumping in and out of the market. Figure 4 shows returns for different trading strategies around presidential elections.

Final thoughts on election-year investing

It’s easy to get swept up in the divisive climate during an election year but remember that markets are truly nonpartisan; the economy drives performance.

Despite the many challenges in the past few years, the U.S. economy has remained resilient. Over the long term, U.S. stocks have averaged positive returns regardless of election outcomes.

The bottom line: Don’t fall for any of the common myths about investing in an election year. Instead, be aware of your biases and confident in your long-term financial plan.