Do Elections Make Markets Happy, Sad or Angry?

iDd digs into election results and their effects on the markets.

AnalystKit.com

Mixing AI with tried-and-true calculations, to find you find the best stocks in a single click!

Chapters

• 0:51 Elections: Bad for Markets?
• 1:31 Economy Boost
• 2:28 Congress
• 3:44 Parties
• 4:57 Is One Party Better for Markets?
• 5:40 Gridlock
• 6:56 Tips

Transcript

All right, so election season, it's heating up out there,
isn't it?
And the news cycle, it's, well, it's a lot to take in,
isn't it?
And I don't know about you, but I always start to wonder,
should my portfolio be reacting to all this?
Should it be making changes based on who's ahead
in the polls this week?
So that's what we're diving into today,
how elections really affect the market.
And let me tell you, there are some surprises in store.
We've got great material to work with today, excerpts
from Fidelity and US Bank, both digging
into the historical data and getting insights from the experts.
So we're going to try to separate myth from reality
when it comes to elections in the market.
You ready to bust some myths?
Absolutely, let's do it.
OK, so myth number one, that election years
are inherently bad for the stock market.
I mean, you hear that everywhere.
You hear it all the time.
But get this, Fidelity found that since 1950, the S&P 500,
it's actually seen an average return of 9.1%
during election years.
9.1%?
Yeah, 9.1% doesn't sound so bad, does it?
No, not at all.
But you make a good point.
It's an average.
And it's super important to remember
correlation doesn't equal causation,
just because something happens alongside something else
doesn't mean one cause the other right.
And the stock market, thankfully it tends
to trend upwards over the long term,
no matter who's in the White House.
So this data point from Fidelity,
it's more about busting that myth
that elections equal a market downturn.
OK, that's good to know.
I feel a little better already.
But what about that other idea, the whole juice
of the economy thing, you know, that the party in power
tries to give the economy a boost right before an election,
hoping to sway voters.
I mean, that's got to have some kind of impact, doesn't it?
I know, right?
I'd be tempted to pull some levers if I were in that position.
It makes for a good political thriller plot, for sure.
But Fidelity's research, especially insights
from their VP of Capital Market Strategy on New Gagar,
she suggests it doesn't really hold a ton of weight
here in the US.
Really?
You're saying it's not as big a deal as we might think?
That's what the Gagar is saying.
She points to the fact that developed markets like the US,
we have those independent central banks
and generally stronger, more robust systems in place
than a lot of other places.
So those politically driven economic swings,
they just don't have the impact we might think they do.
Fascinating.
So if it's not all about the presidential election,
where should we be focusing our attention?
Who else should we be watching?
This is where it gets really interesting.
US Bank really emphasizes that it's those down ballot races,
the ones for Congress, that can be just as if not
more important for investors than who's in the White House.
I'll admit, it's easy to get totally fixated
on the presidential race and kind of tune out
all those other races with all the campaign ads
and everything.
What is it about those races that's
so critical for investors?
It comes down to the balance of power, really.
The idea of a divided versus a unified government.
See, a unified government where one party controls
the presidency, A&D, both houses of Congress while,
that can make for a much smoother, potentially faster path
to enacting their agenda.
And that, of course, has ripple effects
across different sectors and industries.
But now flip the script.
Imagine a divided government
where different parties control the White House and Congress.
Well, that can often lead to gridlock.
It's like that game of tug of war,
each side pulling the rope in a different direction
and not much movement happens.
Right, I can picture that.
Exactly.
So a unified government means,
potentially quicker policy changes
and a divided government,
now that might mean more of a legislative standstill.
Yeah, you could say that.
And that actually brings up another really common investor
instinct that we should probably talk about.
You might be thinking, OK, so if this party wins
and this particular industry tends
to benefit from their policies,
maybe I should put some money into that industry.
Oh, absolutely.
That's totally across my mind.
Like if party A wins, maybe I should go all in on tech stocks
or if it's party B, maybe health care is the way to go.
I think a lot of people fall into that line of thinking.
But both fidelity and US bank,
they actually advise against making
these big investment decisions based only on,
you know, predicted policy changes.
Oh, really?
I'm curious why is that?
Why shouldn't we try to get ahead of the curve like that?
Well, there are a few reasons.
For one thing, campaign promises they're one thing right.
But the reality of governing,
of actually getting things done or not getting things done,
let's be honest, especially in those cases of gridlock,
can be a whole different story.
Right, those campaign speeches,
they don't always translate into action on Capitol Hill.
You got it.
In Fidelity's on Ugegar,
she brings up another really good point.
Historically, there just aren't that many consistent patterns
when it comes to sector performance and elections.
Trying to pick winners and losers based just on which party wins
is, well, it's pretty risky.
Yeah, that makes sense.
OK, so maybe trying to time the market
based on specific sectors during an election year,
maybe that's not the best approach to do we noted.
But what about that other big election year myth?
The one that says one party is just inherently better
for the market than the other.
Is there any truth to that at all?
That's a big one, right?
It's a popular one, for sure.
But both Fidelity and US Bank in their research,
they actually debunk that myth pretty convincingly.
When they looked at the historical data,
it showed that the S&P 500 has actually
performed well under pretty much every combination
of President and Congress regardless of party.
Interesting.
So the market really doesn't seem to care
if it's looking at a sea of red or a wave of blue, huh?
It's pretty fascinating, right?
And it gets even more interesting.
There's actually some evidence to suggest
that divided government, yeah, the one
that seems like it would be a recipe for stagnation
has actually been correlated with stronger market returns
in some cases.
Wait, really?
Divided government?
I always thought gridlock was like the enemy of progress,
at least when it comes to the markets.
Right, you'd think so.
But one theory that researchers have
is that gridlock can sometimes lead
to get this less policy uncertainty.
And the market hates uncertainty.
So even the possibility of a little more stability,
well, it can make investors feel a bit more confident.
So I guess when one party doesn't have free reign
to make huge changes, it can actually create
a more stable, more predictable environment
for businesses and investors,
which then makes everyone feel a little more secure.
Exactly.
And that stability can translate
into more confidence in the markets.
So that leads us to the big question.
What does all of this mean for us as investors?
We're trying to make sense of this election year roller coaster
and make smart decisions about our money.
So I guess trying to pick a winner in the political arena
isn't necessarily going to make us winners in the market.
Right, exactly.
It's tempting to think that way for sure.
But like I said, the experts at both Fidelity and US Bank,
they're pretty clear on this one.
Trying to time the market based on election outcomes
is, well, it's usually a losing game.
OK, so then what should we be doing instead?
It's easy to feel kind of powerless
when there's so much uncertainty in the air.
I get it.
It's totally understandable.
But here's the good news.
This is where we can actually empower ourselves as investors.
And it's a lot simpler than we might think.
Focus on the fundamentals, not the forecasts.
Tune out that election noise
and just stick to your long-term investment plan.
Music to my ears.
Sticking to the plan, it's always easier
to set than done though, isn't it?
Especially when it feels like the news cycle
is working overtime.
Oh, for sure.
It's normal to get caught up in the excitement of it all,
the debates, the predictions, all that.
But remember, at the end of the day,
it's things like corporate earnings, interest rates,
overall economic growth.
Those are the factors that have the biggest impact
on your portfolio in the long run,
way more than the political horse race.
Yeah, right.
Those fundamentals are what really drive the market.
Exactly.
It's a good reminder that we actually
have more control than we think.
We can choose what we pay attention to,
how we react to those market ups and downs.
I love that.
This has been a really eye-opening deep dive.
I had no idea that elections could be so,
well, maybe not boring,
but definitely less market moving than I thought.
So about perspective, right?
The political stuff, it's exciting.
No doubt about it.
But when it comes to our investments,
a calm and steady approach,
that's what's gonna serve us best.
And those market fundamentals, there are compasses.
There are compasses, I like that.
So as we head into the thick of election season,
I wanna leave you with this.
What are you gonna focus on?
The political pundits and all their predictions.
Or your own well-crafted financial plan.
That's it for today's deep dive.
We'll be back next time with another fascinating topic,
ready to separate facts from fiction
and give you those aha moments
that make you the most informed person
at every virtual table.