You may already be tired of hearing about the presidential election and the potential impact on our country and the economy. I am frequently asked how a Trump presidency or a Sanders presidency will affect the stock market. Clients want to know what they should do to protect their investments – or if protection is even warranted. Much has been written about the Trump Effect and voter discontent. However, from an investment perspective, presidential election cycles are nothing to be worried about.
The stock market has fluctuated through more than 45 election cycles since 1833. Election cycles occurred during financial panics, wars, recessions, and also during economic booms. The Stock Trader’s Almanac reports the Dow Jones Industrial Average has gained an average of about 6% in election years. This is just an average and certainly doesn’t predict what will happen in 2016. History has also shown it doesn’t matter much which party wins in November. Since 1900, the stock market has done slightly better under Democratic administrations than Republican. Even though Republican policies are generally thought to be more pro-business.
It’s important to remember that the stock market is made up of businesses. Businesses have a great track record for adjusting to political and economic change. The policies of the next president will impact some businesses positively and others negatively. Those negatively impacted will adjust and adapt. It’s hard to predict which businesses will be the winners or losers today even if we knew who was going to win the election. That’s why portfolios need to be diversified.
Some investors may be tempted to go to cash and wait until the election is over. They think that the fog will clear after November and investment decisions will be easier to make. However, there will be just as much uncertainty in January. The winner of the election will be known but the future of his or her policies, success at getting the policies implemented, and the effect of those policies will still be unknown. For an investor with a long term perspective, today is still the best time to invest.