It’s that time again: election season. In November, voters will head to the polls to cast their votes for the 45th president of the United States. While the presidential election and its implications on the financial markets is always a hot topic, does it really affect it?
In a recent article published by Charles Schwab, Lee Bohl writes, “The good news regarding election years in the stock market is that the Dow Jones Industrial Average has registered a full year gain 70 percent of the time and, regardless of which party wins, the last seven months of a presidential election year have been up 87 percent of the time (fourteen out of sixteen) since 1950.”
Please keep in mind that Lee Bohl’s comments refer to past presidential elections – not the current election. Although this is good information for the here and now – while we are preparing for a new president – what historically happens after the elections are over?
This is the start of what’s called the “election cycle.” According to Schwab Center for Financial Research, based off of S&P data from January 1st 1950 through December 31st 2015, the first year in an election cycle is often the toughest on stocks. In the first year of an election cycle, we see positive returns in the S&P 56 percent of the time. However, by the third year of an election cycle, things pick up, with average returns of 16.4 percent.
As with all projections, we can’t always count on history to predict the future. The financial markets, like most things, are partial to certainty. The presidential election is just another factor that can cause uncertainty.
So, wondering how you deal with this uncertainty?
It’s important to remember that knee-jerk reactions or making major shifts in a portfolio can have big effects in the long run in an individual’s investment portfolio. Diversification and a long-term perspective should be the main focus for any investor who wants to maximize retirement and minimize the potential downfall from getting too wrapped up in short term events.
Whether we’re talking about interest rates, the most recent market correction or Brexit, we do know one thing for sure – market volatility is something we will likely always need to deal with. It’s how we manage our emotions through the ups and downs that will help determine our long-term success.
Taylor Vilhauer is an investment advisor representative with KMS Financial Services, Inc. He is also a partner with Vancouver based investment management and financial planning firm Sustainable Wealth Management.