There is an undeniable link between politics and investing. Presidential administration changes often lead to new economic policies, which can shift the trajectory of the country’s private sector. With the presidential election approaching, it’s crucial to understand how political outcomes could impact your portfolio.

Election Years Are Typically Good for Markets

Historically, election years have often been good for markets. Since 1952, the S&P 500 has gained an average of 7% during presidential election years (1). This year, 2024, the index has performed even better than the historical figure, already showing gains of over 18% year-to-date.

Why do markets perform well during election years? One reason is that election cycles create a sense of stability. Market participants expect the government, regardless of who is elected, to implement policies designed to stimulate growth and economic stability. Politicians from both parties typically focus on economic promises, and the anticipation of these policies can have a positive impact on investor sentiment.

While history shows an overall positive trend, the markets don’t always follow a predictable path. It’s essential to dig deeper into how different political factors may influence specific sectors.

Don’t Try to Predict Industry Performance

Although conventional wisdom often suggests that certain sectors perform better under specific administrations, historical data shows this isn’t always the case. For example, Republican administrations are often viewed as more pro-business, and many investors believe they’re better for the technology sector. However, since 1976, the tech sector underperformed the market in five out of six years when a Republican president took office (2).

Beyond technology, other sectors also show unpredictable behavior during election years:

• Energy: Democratic administrations are often seen as favorable for renewable energy due to their environmental policies, while Republicans are thought to boost the oil and gas sectors. Yet, energy markets are more heavily influenced by global demand and supply factors than by U.S. policies alone.

• Healthcare: Many investors expect healthcare stocks to struggle under Democratic administrations due to potential reforms. However, the healthcare sector often proves resilient, as demand for healthcare services remains constant regardless of policy shifts.

This unpredictability is why Anu Gaggar, vice president of capital markets strategy at Fidelity, says, "There are very few consistent patterns of relative sector returns in election years." Instead of trying to time sector performance, investors should prioritize diversification across multiple industries and asset classes.

Congressional Races Matter Too

While the presidential election dominates headlines, investors should also pay close attention to Congressional races. The balance of power in Congress can significantly influence market outcomes. Historically, a divided Congress—where one party controls the House and the other controls the Senate—has led to higher returns for the S&P 500. In contrast, a Republican president with a divided Congress has historically resulted in the lowest returns for the market.

Why does a divided Congress lead to better market performance? One reason is that a divided government often results in legislative gridlock, which prevents sweeping policy changes that could create uncertainty. For investors, stability and predictability in policy are key factors in driving market confidence.

For example, during the Obama administration’s second term (2014-2016), the market experienced solid growth, despite a Republican-controlled Congress. The inability to pass controversial legislation often leads to market optimism, as businesses can plan for a steady regulatory environment.

Keeping an eye on down-ballot races this election cycle could offer insights into how Congress’s power dynamics may shape market performance.

Policy Changes Often Don’t Make an Impact Right Away

One of the most common mistakes investors make during election years is reacting too quickly to the results. Once the election is over, there’s often a flurry of market activity based on speculation about upcoming policy changes. However, in reality, even if a new administration takes office, their policies may not impact the economy and markets immediately.

Research shows that it can take months, or even years, for new policies to ripple through the economy (3). For example:

• Tax Policy: While tax cuts may take effect quickly, it often takes time for businesses to adjust and for the long-term effects to be reflected in corporate earnings.

• Infrastructure Spending: Major spending bills, like those focused on infrastructure, often require lengthy approval processes and even more time for projects to begin. The economic boost from such spending could take years to materialize.

• Healthcare Reform: In the case of healthcare reforms, even if new laws are passed, the actual implementation of those policies may stretch over several election cycles.

Though the immediate reaction to election results can cause short-term volatility, it’s critical for investors to remain patient and focus on long-term strategies rather than getting caught up in the initial market movements.

The Importance of Staying Diversified

Given the relative uncertainty surrounding election years, diversification is one of the most effective strategies to protect your portfolio. Diversification spreads your investments across different asset classes—such as stocks, bonds, real estate, and international markets—allowing you to minimize the risk of a single sector or asset class taking an outsized bite from your portfolio.

• Global Diversification: While U.S. elections primarily impact domestic markets, international markets may remain less affected. By investing globally, you can reduce your exposure to risk posed by changes in U.S. policies.

• Sector Diversification: By diversifying across sectors like technology, healthcare, energy, and consumer goods, you can insulate your portfolio from sector-specific volatility.

• Rebalancing: Regular rebalancing helps ensure that your portfolio remains aligned with your long-term financial goals. As market conditions change, your asset allocation might need adjustments to maintain the right balance between risk and return.

 Staying diversified allows you to navigate the uncertainties of an election year without making emotionally driven changes based on political predictions or outcomes. Keep in mind that diversification does not eliminate the risk of loss.

What Can Investors Do During Election Years

Rather than trying to guess the outcome and its impact on your portfolio, consider the following steps:

1. Stick to Your Plan: Don’t make sudden changes to your portfolio based on election news. Your long-term financial goals should guide your investment decisions, not short-term political events.

2. Avoid Emotional Reactions: Election years bring heightened media coverage and intensify emotional reactions. Resist the urge to respond to every headline with a portfolio adjustment.

3. Consult with a Financial Advisor: Election years can create uncertainty, and having an expert’s perspective can help you avoid impulsive decisions. A financial advisor can help you review your portfolio and adjust it based on your risk tolerance and long-term objectives.

Conclusion: Adapt to Change, But Focus on the Long Term

While elections can create short-term volatility, the key to successful investing, we believe, is focusing on the long term. Political outcomes, while important, are just one factor in a much larger economic picture. A well-diversified portfolio and a disciplined investment approach are the best defenses against election-related market uncertainty.

As always, consulting with a financial advisor can help ensure your portfolio is prepared for both the challenges and opportunities that come with an election year.

Sources

1: https://www.lpl.com/research/blog/presidential-cycle-still-supportive-of-stocks.html

2: https://www.fidelity.com/learning-center/trading-investing/election-market-impact

3: https://fivethirtyeight.com/features/a-presidents-economic-decisions-matter-eventually/

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