Election Day in the U.S. has come and gone once again and while the full outcome may still be uncertain, one thing we can count on is that plenty of opinions and predictions will be floated in the days ahead surrounding the vote. In financial circles, this will inevitably include discussion of the potential impact on markets. But should elections influence long-term investment decisions? We would caution investors against making changes to a long-term plan in a bid to profit or avoid losses from changes in the political winds.
For context, it is helpful to think of markets as a powerful information-processing machine. The combined impact of millions of investors placing billions of dollars’ worth of trades each day results in market prices that incorporate the collective expectations of those investors. And so far, investors appear to be treating initial election results with some calm, with the stock market up slightly this week so far. Part of this calm may be due to the likelihood that the Senate will remain in Republican control, which limits the likelihood of more radical changes in Washington. It is not that unusual for markets to remain calm around elections as data for the stock market going back to 1926 shows that returns in months when presidential elections took place have not tended to be that different from returns in any other month.
It’s natural for investors to look for a connection between who wins the White House and which way stocks will go. Also, we realize emotions are high and if your candidate or party doesn’t win, it can cause personal feelings that the country is heading in the wrong direction, and thus the stock market will follow. But we caution investors to separate their political beliefs vs. their investment decisions, and vote just with your ballot, not with your wallet. The stock market moves up on economic fundamentals and company fortunes, not based on political outcomes. Companies adjust and focus on serving their customers and helping their businesses grow, regardless of who is in the White House. Stocks have historically rewarded disciplined investors over the long term, through both Democratic and Republican presidencies, and we don’t expect the future to be any different. In fact, according to research from Vanguard, the performance of a balanced portfolio has been virtually identical no matter which party controls the White House, using data going back to 1860.
Making investment decisions based on the outcome of elections, or how investors think they might unfold, is unlikely to result in favorable outcomes. On the contrary, it may lead to costly mistakes. Accordingly, we think investors should instead rely on a diversified portfolio with an appropriate asset allocation policy consistent with their long-term goals and objectives and stick with this plan, regardless of which party controls the White House. In summary, short-term developments, like the 2020 presidential election, are less important to investors’ success than global economic fundamentals that will shape markets in the years ahead.
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