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Election Impact on the Economy...It's Debatable

October 19, 2020

By: Peter Conte, Vice President and Portfolio Manager, Girard, a Univest Wealth Division

Every four years, the U.S. presidential election can have a major impact on policy, laws and foreign relations. But how do presidential elections affect the stock market? And how does that affect you as an investor?

To better understand, analysts studied market data from the past 90 years and identified patterns that repeated themselves during election cycles. While these are predictions only based on historical data, it helps illustrate how these patterns might affect your portfolio, what you should know for the 2020 election, and how to weather election cycles as an investor.

A review of market data for the S&P 500 going back to the 1930s revealed certain patterns emerging over those 90 years. The analysts saw that, on average, both stock (equity) and bond markets showed more muted performance in the year leading up to a presidential election than they did at other times.

In any given 12-month period, the analysts saw equities generally providing gains of about 8.5 percent – but in the year leading up to a presidential election, gains totaled less than 6 percent. Bond markets provided similar results, with returns of around 6.5 percent in the year leading up to a presidential election, compared with their more typical 7.5 percent in any given 12-month period.

There are a few different variables that can affect the stock market performance:

  • After an election, stock market returns tend to be slightly lower for the following year, while bonds tend to outperform slightly after the election. It doesn’t seem to make much difference which party takes office, but it does matter whether control of the White House changes hands.
  • When a new party comes into power, the analysts found that stock market gains averaged 5 percent.
  • When the same president is re-elected or if one party retains control of the White House, returns were slightly higher, at 6.5 percent.

When it comes to this year’s election, it’s important to keep a big-picture perspective. Economic volatility from public policies tends to be contained within specific industries rather than affecting the general economy.

The healthcare sector, specifically, can show increased volatility leading up to a presidential election. While the 2020 candidates are proposing a wide range of reforms, the congressional elections are important here, too. Healthcare policy is largely driven by legislators, so a change in who controls Congress could determine whether the new president’s healthcare vision becomes a reality.

During the 2020 election, one could also anticipate that the energy sector may see increased volatility due to the differing regulatory stances of the two parties on domestic energy production. But more than any other policy issue, trade is one worth watching. The trade policy will not only be affected by who occupies the White House (given the wide-ranging trade powers granted to the president), but also whether the Senate remains in Republican hands, as Congress has the authority to approve new trade deals. Once the election is over, it is a good time to reevaluate how the policies that are championed by newly elected officials could affect the global economy.

Keeping an eye on which sectors are most likely to be affected by the presidential election (like healthcare) is smart. But there’s no need to panic about market volatility during election season. Increased volatility has become more woven into the investing landscape even without the upcoming election (consider COVID-19 and racial justice issues) — and that might not necessarily spell bad news, especially when the economy is otherwise sound.

While the drama of a presidential election can make your imagination run wild, what you need to watch is ultimately how policies will affect the domestic and global economies. Although a few investment opportunities may arise through an understanding of volatility and performance patterns in election years, the best rule of thumb may simply be to stay invested and make sure your portfolio is rebalanced when necessary.

Returns are made over a full business cycle, which is longer than even one presidential term. With presidential elections, you need to make sure to have all the components of a diversified portfolio in place, and then stick to a longer-term strategy that’s designed for more than one election cycle. Working with a financial advisor can help you create an investment strategy that matches your time horizon and risk tolerance and help you stick with that plan even while navigating emotionally charged current events. To have a conversation about your financial goals and how we can help, please reach out to a Girard advisor.

 

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This article is for general information purposes only and is not intended to provide legal, tax, accounting or financial advice. The information in this article, and any opinions expressed therein, do not constitute a recommendation or an offer to buy or sell any security or financial instrument. Viewers should consult with their financial and/or legal professionals before making any financial decisions.

The S&P 500 index referenced is not managed and cannot be invested in directly. Past performance is no indication or guarantee of future results.