The Election and the Market

The presidential election is on everyone’s mind this fall, and many of our clients have expressed understandable concern about what effect the election will have on the stock market. Regardless of political leanings, many view the political situation as a sinking ship that will inevitably drag the market down with it.

Not necessarily, if history is any guide, at least not long term. Vanguard Funds researched the historical data and published a summary of their findings in an article titled “Election: Markets are nonpartisan long term.” While in the short-run, volatility tends to increase around an election, the volatility tends to return to normal levels shortly after the election. Furthermore, market history shows that in the past, it hasn’t mattered which party won the election. Market returns have been virtually the same regardless of whether a Democrat or a Republican controlled the White House.

Vanguard’s research shows that volatility typically rises dramatically in the 100 days prior to an election, but then returns to more normal levels within the 100 days following the election. So we should not be surprised if we see large swings in the market between now and the election.

“The markets don’t like uncertainty, and presidential elections by definition add another layer of uncertainty,” writes Jonathan Lemco, Ph.D and a  senior strategist with Vanguard Investment Strategy Group. However, that uncertainty does not necessarily change long-term market trends. Lemco continues, “… investors should invest for the long term and not subject themselves to the political whims of the moment.”

Vanguard’s research further indicates that the outcomes of elections don’t have much impact on the markets, either. Vanguard found that when a Democrat was in the White House, the stock market returned 11%. What about when a Republican is President? Yep, the market averaged the same 11%.

This year feels different, with more polarization among supporters on either side than ever before. Will the extreme emotions we are seeing this year translate into more volatility, or worse long-term market results?

James Solloway, CFA and Managing Director for SEI Private Trust Company notes in his Economic Outlook for this quarter that “both candidates seem set on providing a… fiscal policy boost” to the economy through government spending, and reminds us that, while we focus on the President, “There is a high degree of institutional inertia which is partly deliberate” through our constitution’s checks and balances on the executive’s power.

Polarizing as the candidates may be, it is unlikely either will have too much ability to effect the long-term economy, for better or for worse.

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