Do Elections Impact the Stock Market? (Article)
Do Elections Impact the Stock Market?
Whether you’ve sat down at home to watch TV or visited YouTube to watch cute puppy videos, odds are you’ve been inundated with political advertising leading up to the midterm elections. While we can all breathe a sigh of relief that the election is over, it begs the question: should I be making changes to my investment strategy based on the results of the midterm election, and what impact do elections have on the stock market?
Regarding whether elections impact the stock market, the answer is an emphatic yes. The market is a forward-looking measure of the economy, meaning that investors are making investment decisions based on what they think the economy will look like in the future. With the major political parties in the U.S. holding different views of how to manage fiscal policy, it’s reasonable that investors will make decisions based on which party holds power to enact legislation that could stimulate certain sectors of the economy while devaluing others.
The year in which midterm elections take place also tend to be more volatile for markets. Based on data from Capital Group looking back to 1970, years in which there is a midterm election tend to be two percentage points more volatile (based on standard deviation of returns) than all other years. 2022 has been no exception as markets have grappled with the war in Ukraine, supply chain issues, persistent inflation, rising interest rates, and the midterm elections. This has manifested in poor overall performance for markets, with the S&P 500 index down over 20% this year (as of November 9th, 2022).
Though elections can impact the markets, over the long run this effect is negligible at best. Despite the temptation to make changes based on who holds power in Washington, long term investors should stick with a sound investment strategy that isn’t captive to the moment. History shows that stock returns are favorable over the long term regardless of which political party holds power. If you have a portfolio that is appropriately diversified and invested based on your time horizon, odds are that strategy will work throughout the various political changes in the years to come.
Don’t get caught up thinking “but things are different now”. Despite all that as happened in recent memory (Covid, 2008 financial crisis, 9/11, etc.) the markets have still shown to be a great place to grow your assets over the long term. If you’d like to have a co-pilot with you to make sure your assets are appropriately invested, our sales-free team of financial planners stands ready to help. Visit moneyadviceatwork.com/learnmore to get started.
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