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Election’s impact on markets? Investors should consider history as a guide | Opinion

With the U.S. presidential election around the corner, many investors are understandably worried — and maybe even anxious — about how the election will affect the stock market and their retirement accounts. Historically, election years often produce increased market uncertainty. This year COVID-19 and a fragile economy have added new dimensions to this year’s election cycle.

But when examining how the markets may play out and what investment decisions to make, investors should consider history as a guide.

Market volatility historically begins to rise about one month before the election. The reason for this pre-election volatility is simple: uncertainty. It is important to remember that markets like certainty and that a presidential election, by its very nature is a cause of uncertainty. When a potential event causes uncertainty the markets react with volatility. An example of this is the beginning of the pandemic earlier this year.

As J.P. Morgan Asset Management’s team noted in January, an incumbent president has won re-election 63% of the time, and, since the Civil War, sitting presidents who weren’t re-elected had economic recessions during their term. Over the past nearly 90 years, markets tended to sell off in the period from Election Day to the end of that year, but subsequently performed better under Democrats than Republicans during the first full calendar year of an administration. Yet, much of that market activity can’t necessarily be attributed to the president or party itself during that first year because markets are influenced by many other factors.

When control of the White House changes parties, stock market volatility tends to increase post-election as the markets grapple with the potential new policies of the incoming administration. However — as Ameriprise Global Asset Allocation Committee noted in August — it is important to remember this volatility is only short-term. In the long run, it does not matter which party is in the office. The market usually sets a higher-high over time.

One might extrapolate that investors may be underallocated to risk assets or even pull out of the market if they feel strongly negative about a president. However, U.S. large cap equities (measured by the S&P 500 total return index) experienced 16.3% annualized returns during the Obama administration, 15% during the first three calendar years of the Trump administration, and 10.6% overall over the past 50 years. This highlights how strong returns have been over the past decade, and how much investors could have missed out on if they let their politics get the best of them and deviated from their investment plans, as stated by J.P Morgan’s Asset Management’s team.

Another historic trend is that during an election year, U.S. stocks and bonds tend to perform better compared to the year after, according to Darrow Wealth Management’s “Stock Market Performance by President” report. Additionally, the market typically has always given the incumbent or potential new president a honeymoon grace period. However, thanks to COVID-19, these trends may not hold true this cycle.

Every election cycle, there is often a debate about whether the economy does better under a Democrat president or Republican president. Interestingly, there has been very little difference in the performance of the economy under Democratic and Republican presidents since 1977. According to recent analysis by Deutsche Bank, “The average growth rate for a Democrat President is 2.9% compared to 2.7% for a Republican President.” However, according to the bank, economic performance during a president’s term isn’t necessarily a direct result of the actions of their administration, as president’s ultimately inherit an economy shaped by their predecessor’s actions, as well as other structural factors.

What may be a more important consideration for investors than who is elected president are the longer-term drivers of economic growth and corporate profits, which are shaped by policy but also by other factors outside Washington.

It’s speculative to predict the outcome of the election and all of the policy implications each party would impose. But the election’s result is likely to influence key industries. Among the sectors of the market that could be affected in different ways are healthcare, energy and technology.

While it’s natural to think about the impact of the election on your investments, it’s only one factor. History shows it is more important to stay attuned to the bigger picture of your long-term goals. Review your portfolio diversification and risk tolerance with a financial advisor for an objective perspective on your financial situation.

Sandy Jukel is a financial advisor and managing director with Ameriprise Financial Services, LLC in Coral Gables, Florida. He specializes in fee-based financial planning and wealth management strategies and has been in practice for 36 years. 786.598.4477; 2 Alhambra Plaza, Suite 750, Coral Gables, FL 33134. www.ameripriseadvisors.com/sandy.jukel