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Election Impacts on Investor Strategy

Sep 19, 2024
  read time: 2:23

Election Season Impacts on Markets: A Pragmatic Approach for Investors

Every four years, the anticipation surrounding U.S. presidential elections brings with it heightened uncertainty for investors. With major policy changes potentially on the horizon, many wonder whether they should adjust their portfolios in response to the political climate. 

It’s important to note that while short-term volatility may occur, maintaining a steady, long-term investment approach is typically the most prudent course of action. Interestingly, history shows that markets tend to rally regardless of which party takes power. That suggests that investors should focus on fundamentals rather than political speculation, ensuring they make sound financial decisions that align with their long-term goals.

Impact Overrated?

One of the biggest challenges investors face during election seasons is separating fact from media-driven fear. Many investors base their decisions on biased news sources, whether it’s Fox News warning of an economic collapse under Kamala Harris or MSNBC portraying Trump as a threat to global stability. However, the reality is that market performance is not dictated by which candidate wins. In fact, as the market tends to rally after elections, regardless of the winner, the influence of political drama on long-term investments may be less significant than many believe.

Historical Market Performance and Uncertainty

The S&P 500 has historically outperformed in election years versus the other three years under a President. In addition, the second half of an election year typically outperforms full election year results. 

Following elections, the stock market has performed well, even during periods of uncertainty. A prime example is the 2020 election when the market rose by over 4% despite not knowing the winner for several days. This pattern holds true even during crises like the 2008 financial downturn, where markets rallied after Obama’s election. The key takeaway? Markets dislike uncertainty and tend to recover once a winner is declared.

The Limited Impact of Presidential Power

While presidents propose policy changes, most significant economic decisions require approval from Congress. A president without full control of Congress typically faces limitations in implementing radical changes, making it harder to enact policies that could seriously disrupt markets. This reduces the likelihood of dramatic market movements based solely on election outcomes. For example, if Congress remains divided, it will be difficult for policies like aggressive tax changes or extreme regulatory shifts to be implemented.

Key Sectors: A Closer Look at the Impact of Candidates

While long-term investors should avoid reacting impulsively to political outcomes, certain sectors may see short-term fluctuations based on the winning party’s policies.

  • Under Trump: Sectors like financials, energy, and auto manufacturing typically fare well under Republican administrations, which favor deregulation and protectionist policies. Banks, natural gas, and U.S. car manufacturers could benefit, while industries reliant on imports, like retail, may face challenges due to potential tariffs. Another thing to consider regarding the oil companies is that they may not do as well if Trump’s effort to increase oil supply reduces prices. 
  • Under Harris: A Harris presidency could boost renewable energy, electric vehicles, and infrastructure projects, sectors traditionally supported by Democratic policies. Conversely, companies in food manufacturing may face challenges due to proposed regulations and price controls.

Managing Volatility During Election Years

Although elections can increase uncertainty, savvy investors understand the importance of staying disciplined and diversified. During periods of volatility, emotions can run high, but rash decisions may hurt long-term gains. Studies show that investors who try to time the market, particularly around events like elections, often miss out on key rebounds. This is why it’s vital to keep your long-term goals in focus rather than trying to predict market movements in the short term based on the election.

Conclusion

As election cycles come and go, so too does the market volatility associated with them. While it’s natural to have concerns about how political shifts may impact your investments, reacting emotionally to short-term market movements often does more harm than good. The key is to focus on your long-term financial goals, stay diversified, and consult with your financial advisor to ensure your portfolio is well-positioned, no matter the election outcome.

Provista Wealth Advisors are here to guide you through periods of uncertainty, providing personalized advice to keep your financial plan on track, no matter the political landscape. Contact us to explore our specialized services or schedule a consultation.

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