Election season brings noise that can feel overwhelming and anxiety-inducing, especially with concerns about its effect on the markets. However, many common fears about elections and investments are simply misconceptions.
The first misconception is that presidential elections lead to down years in the market. Statistics prove that this is a myth. Since 1944, there have been twenty presidential elections. In sixteen of those, the S&P 500 experienced a positive return for the first year. In fact, the median return for presidential election years is 10.7%. Of the four election years that saw a negative return, two did occur in this century – in 2000 and 2008 – but on both occasions, the nation was either entering or in the midst of a significant recession.
The second misconception is that if one candidate wins, the market will plummet. Fears of this event taking place are unfounded, as markets have performed well under both Republican and Democratic presidents. Since 1944, the median return of the S&P 500 in the year after a presidential election is 9.8%. If we shrink the window to 1984 and beyond, that number has risen to 24%. Markets are driven by the economy more than elections. Variables like the flow of trade, supply and demand, continuous innovation and consumer confidence are all important examples. And although the president does have an influence on these areas, they are just one of many forces dictating the market.
You and I can’t control who the president will be. We can’t determine how the markets will react. But what we do have control over are our investment decisions. Political campaigns and the media that cover them are there to create noise. Noice provokes emotions. What we must guard against is letting those emotions cloud our judgement and stoke irrational financial decisions. So, as we draw near to another election, tune out the noise. Remember these misconceptions and avoid them. Our team is always here to answer any questions you may have.
