We've started to field some questions from clients who are concerned about the potential impact of the upcoming Presidential election on their portfolios. I assume this is a pretty common concern so thought it would be helpful to go ahead and address it.
So...does the outcome of a Presidential election have a significant impact on stock market returns over the course of a Presidential term?
Historically, the S&P 500 has averaged 8.8% annually under a republican President, and 8.6% annually under a democrat President. Compounded over the course of 4 years, that comes out to a 49% total return on average with a republican in office vs. 46% with a democrat in office.
So over the course of 4 years, it appears the market is pretty indifferent to who's in the Oval. Might the election result cause some short term volatility as the market reacts and adjusts to the outcome? Sure. In the short term, the stock market is notorious for overreacting so it would be justified to expect some swings in one direction or another in the weeks/months following the election.
But what history shows us is that over the course of 4 years, the person sitting in the Oval office has had very little impact on how many iPhones we buy, how many Cokes we drink, how many cars we purchase, how many vacations we take, etc. Whether we think a certain party or candidate is "good" or "bad", it's ultimately economic fundamentals that matter over time. The economy is largely driven by consumers (you and me), and politics don't seem to have a major impact on how we collectively spend our money, and in turn, how much money corporations are earning.
So while the outcome this fall may satisfy or disappoint you, don't let that feeling spill over into a hasty financial decision. If you're making investment decisions based on the outcome of an election, it likely means you're acting out of anger or fear. Neither of those emotions lend themselves well to prudent financial decisions. We've got to be pragmatic towards our investments and avoid making decisions based in emotion.
No matter the result this fall or how you may feel about it, just remember that over the course of 4 years, the result has historically had very little impact on the stock market.
Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful.