Elections can impact markets but not as much as you might think. If you have a good plan, stick with it.
A recent nationwide survey found 74% of investors think which party controls the government has an impact on the stock market—but perhaps not the way you think. A slim 14% believe whoever sits in the Oval Office has the biggest impact, 28% say control of Congress is key, 33% say it’s a combination, while 26% say political control has no impact at all.
What are investors doing about it? Not much. Only 15% of those surveyed have already made or plan to make changes to their portfolios because of the election. The vast majority plans to stay the course.
That’s a good thing, in our view, since history suggests that elections typically have had little lasting impact on overall market performance. Among the most powerful drivers: the business cycle, interest rates, corporate earnings, and when it comes to your personal performance—your investment plan.
“The election may spur volatility—and active investors can try to take advantage of it—but for long-term investors with a solid plan, short-term market swings should be expected,” says John Sweeney, Fidelity executive vice president of retirement and investing strategies. “It’s important to take a long-term perspective. If you have a plan you like, stick with it. If you don’t, work with a professional who can help you build one that will help serve you well, no matter what may roil the markets in the short-term.”
Remaining disciplined during political shifts and financial and geopolitical shocks has proven a smart long-term strategy.
S&P 500 Index price returns, from January 1981 to October 2016. Source: YCharts.
A look back at how the stock market has behaved under different political regimes since 1960 shows that over the long-term there has been no significant difference, on average, between which party controls the White House (see graphic below): The Democratic and Republican average annual returns were both close to 12%. Stocks did about two percentage points better when Democrats swept both the White House and Congress. But a lot more was at play than politics (see graph above). In fact, even using some random criteria like investing in stocks in odd years only would have delivered about 16% average returns, four percentage points above the average, showing the limits of party impact. Says Fidelity sector strategist Denise Chisholm: “Over long time periods, the party composition of our government has not been a critical driver of market performance.”
Investing based on what party wins? Since 1960, you’d have done better picking just odd years.
*Average annualized returns for the 3,000 largest U.S. stocks 1960 – 2015. Source: FMR Co.
Why is there not a clearer connection between party control and overall stock market performance? Says Chisholm: “For one thing, there are many other powerful forces at play impacting the stock market, including employment, interest rates, innovation and other competitive forces. Also, stocks have had the tendency to price in the possibility of policy changes well in advance.”
That doesn’t mean a President or Congress can’t change things through new regulations and policies. In particular, tighter regulation can weigh on the sectors it hits. For example, says Chisholm, the potential for drug pricing regulation has compressed multiples in the health care sector. Tighter regulation has also weighed on financial stocks, where returns on equity are now historically low.
But even these trends do not affect all health care or financial companies the same way. At Fidelity, we believe bottom-up, fundamental company research can identify attractive investment opportunities across all sectors of the market.
“History suggests, investors should not take a simplistic view of election results and think one party or another is going to be good or bad for stocks in general, “says Chisholm. “Still, active managers may be able to take advantage of particular opportunities, or help to avoid specific risks, that result from short-term volatility and could impact company earnings or investor sentiment.”
Disclaimer: Any opinion expressed herein is based solely upon the author’s current analysis and interpretation of such information, is subject to change and does not necessarily represent the opinions of Harbourfront Wealth Management Inc. While we have made every attempt to ensure the information contained in this document is reliable, Harbourfront Wealth Management is not responsible for any errors or omissions, or for the results obtained from the use of this information. All information is provided “as is,” with no guarantee of completeness, accuracy, timeliness or as to the outcome to be obtained from the use of this information, and is without warranty of any kind, express or implied. The opinions expressed are not to be construed as a solicitation or offer to buy or sell any securities mentioned herein. Individuals should consult with their professional advisors, including tax advisors, prior to making investment decisions. Harbourfront Wealth Management is a member of CIPF.