As the November election is underway, concerns over the stock market begin to rise. While the stock market is generally cyclical, history shows that there is a link between the performance of the market and the presidential election. Understanding the trends can help you better predict how the election might impact the stock market so that you can weather election cycles and protect your investments.
How the Market Traditionally Performs After Elections
The past might not provide a definitive answer as to what will happen following the election, but it can help investors make educated predictions. According to US Bank analysts, it doesn’t necessarily matter which party wins the election. What matters is whether or not the election goes to the other party. If a new party wins, the stock market averages a gain of approximately 5%. If the current president gets re-elected or one party maintains control of the office, returns are slightly higher.
It’s Not Just Who’s Elected President
It’s not just who wins the White House that plays a role in how the election impacts the stock market. Which parties have majority control in the House and Senate also plays a role. Democratic or Republican sweeps — when one party controls the White House, House of Representatives, and Senate — often result in short-term market volatility. A mix of control, on the other hand, is more likely to result in market-friendly conditions.
The Market May Predict the President
The state of the market may also be able to predict the outcome of the election. In the past, a market that’s been up for the three months before the election generally leads to the incumbent party winning the White House. If the market has been down for those three months, you can generally expect a new party to take power. Again, this isn’t to say that this is what will happen. Even so, it can help you to make a guess as to what might come to pass.
Protecting Your Investments During the Election Cycle (And Beyond)
Uncertainty regarding the outcome of a presidential election can create some volatility in the U.S. stock market. While it can be unsettling, it’s important to keep a level head. That volatility is generally short-lived, so you want to avoid making decisions too quickly. While there might be a slight difference in the market depending on who wins the White House, the results historically don’t have a significant impact on the long-term performance of the stock market.
One of the best things that you can do to protect your investments is to stick to your long-term plan. Having a strong, well-thought-out strategy can help you weather the short-term volatility that comes with each election year. While you may choose to make small adjustments here and there, you may want to avoid making major changes.
If you’re truly worried about the volatility of the market — or you’re uncertain about what you can do to protect your investments (both during election years and the years in between) — consider working with a fiduciary financial advisor. Their expert advice can help you to focus on your long-term goals, block out the fear of temporary volatility, and make smart decisions that keep your investments safe.