Investing during an election year can be a topic of concern for many investors because of the perceived volatility or uncertainty surrounding political changes. However, historical data and expert opinions suggest that election years themselves do not significantly impact the markets over the long term. Politics tend to have a minimal and short-lived impact on equities. Here are a few key points to consider:
1. Historical Performance: The stock market has been negative during election years only in a few instances, and each time, the reasons were primarily economic or financial rather than directly related to the election itself. Broader economic factors tend to have a more profound and lasting effect on market performance than election cycles alone.
The following chart shows that there have only been four years when the stock market was negative during an election year in the last 100 years. And each time, reasons other than the election caused the drop.
Source: Charles Schwab & Co., Inc., 2024 Schwab Mid-Year Outlook, Slide 37, June 18, 2024, citing Schwab Center for Financial Research, using data from Morningstar. Past performance is no guarantee of future results.
In 1932, America was in the middle of the Great Depression. In 1940, World War 2 had just broken out and Europe was struggling economically. In 2000, the Dot-com (or Tech) Bubble burst. And in 2008, the U.S. experienced the Great Financial Crisis.
2. Short-Term Volatility vs. Long-Term Outlook: While short-term volatility around elections is possible, particularly during periods of uncertainty, the long-term impact of political events tends to be muted. Markets typically adjust to new political realities over time as policies become clearer and economic fundamentals reassert their influence.
3. Focus on Congressional Control: The impact of elections on markets can sometimes be more pronounced when considering which party gains control of Congress. Changes in legislative priorities and policies can affect specific sectors or industries more directly than the presidential election alone. In other words, control of Congress will likely have a bigger impact on the markets than who becomes president. Charles Schwab’s Michael Townsend expressed that Republicans are “favored to capture the Senate majority” while Democrats “have a reasonable chance to win back the House majority.”
4. Investment Strategy: Investors should not make decisions based solely on political events or short-term market fluctuations. Diversification remains a key strategy to mitigate risk and take advantage of opportunities across different sectors and asset classes. Allocating investments based on long-term economic trends and fundamental analysis tends to yield more stable and predictable results over time.
5. Sector Opportunities: Specific sectors may present opportunities based on anticipated government and private sector initiatives. Adjusting allocations to capitalize on these trends can be a proactive strategy during periods of economic and policy shifts. For example, we’ve been increasing our allocation to infrastructure as we expect continued focus on this sector from the government and private companies. While equity allocations vary across client accounts, we’ve allocated around 35% of equities to tech and AI-related companies as these sectors continue to outpace other sectors. We remain vigilant in monitoring developments in this rapidly evolving sector. Private Credit continues to do well, and we are starting to see opportunities in real estate. We’ve also been increasing allocations to private equity.
As always, investors should not let emotions drive their investment decisions. We continue to focus on diversifying client portfolios to reduce the risk of volatility and to take advantage of potential dislocations in various industries. Let us know if you have questions or would like to discuss your portfolio.
The information contained on this site may not reflect current developments; does not constitute investment, tax, or legal advice; and should not be relied upon for such purposes. There is no guarantee that any forecasts made will come to pass. We make no representation about the accuracy of the information or its appropriateness for any given situation. This information is not an offering. Past performance does not guarantee future results.
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