Think back to what you were doing the night of November 8, 2016. If you were like many people in the United States, you were witnessing one of the most memorable presidential elections in American history. I can remember thinking that there wasn’t really much reason to watch the results that night because I, along with many others, assumed that the 45th President of the United States was going to be Hillary Clinton. Even the stock market had clearly priced in a Clinton win. So of course when the results started coming in and it became evident that Trump could indeed win, the stock market futures took a dive that could have given anyone not confident in the principles of long-term investing a massive heart attack. Even I, who understood the fundamentals of long-term investing, lost sleep over the initial market drop. However, while investors around the world continued to watch the results, panic subsided and markets rallied. Not only did markets recover, the decade-long expansion continued all the way through early 2020.
So what caused the short plunge that night in 2016? An unanticipated result and the fact that markets loathe uncertainty precipitated that dive. Regardless of which party anyone sided with in 2016, I believe we can all agree that the principles of investing carried forward like they always do.
Another example of speculating about how the election and the winning political party affect financial markets happened during Obama’s presidency. His opponents thought that he would cause the economy and stock market to tumble. However, the economic expansion that took place while he was in office ended up being the longest in U.S. history. This scenario was another situation where one event (the election) and the stock market trend were not directly related. Regardless of which party is in office, fundamentals always take over in driving long-term returns. Keep in mind that the stock market is nothing more than a collection of large businesses. No matter who wins the presidency, Apple and Coca-Cola will continue selling their products all over the world, and Starbucks will continue taking my money for my caffeine fix!
With the 2020 election just around the corner, and knowing that politics tend to bring out very strong emotions in people (particularly investors), what should one do in terms of one’s portfolio? Add the coronavirus—which does not appear to be waving farewell anytime soon—to this upcoming election, and you have a dangerous recipe for anxiety.
The key to approaching November with confidence is understanding that evidence has shown no correlation between long-term investment returns and election results. In other words, the markets do not have a favorite political party. It may not seem that way, and you may feel strongly that one party or the other will have an impact on your personal financial situation, but history proves otherwise. The long-term trend of markets is upwards. Every president representing any party has had to deal with some major event during his term, whether it was war, global crises, some scandal, etc., yet the long-term upward trend has yet to be broken.
Election times tend to bring out opportunities to showcase the country’s problems. Negativity surges around candidates because the more negativity one party can throw at the other, the better the party placing blame looks. Candidates tend to differentiate their positions by criticizing their opponent’s ideas. The media then comes in to exaggerate and feed on the negativity. What kind of sentiment does this create? Uncertainty. And nothing and nobody hates uncertainty more than the financial markets. Uncertainty leads to fear and market volatility, so it’s common for investors to seek out stability and safety during times of distress. Consequently, investors may feel the need to make their portfolios more conservative prior to an election, regardless of their long-term goals and financial plans.
Rather than asking if you should position your portfolio differently in anticipation of the election, you should ask a different question. Ask whether or not the 2020 election is relevant to your goals. Are you investing for the short or long term? If you are investing for the short term, you likely shouldn’t have that bucket of money invested in stocks. If you are investing for the long term, remember that market cycles are driven by interest rates, monetary policy, business cycles, and the growth or slowdown of the global economy. Certain fundamental factors always drive these cycles. Long-term market trends are not driven by which candidate or political party wins the election.
Remember, regardless of who wins the 2020 election, we will all move on … until the next election. Since we know that this cycle will continue, why change your investment strategy? A long-term investor will experience many elections, which will all be accompanied by a lot of noise. Keep in mind that investing is about the big picture, and rather than trying to time the market, look at what you are ultimately trying to achieve.
As always, the Bluerock team is here to answer any questions!
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