Have you had too much coffee, or are you suffering from election-year jitters? You’re not alone.
Like clockwork, the presidential election rolls around every four years and shakes up the stock market, sending a surge of anxiety into investors nationwide. Election cycles often bring heightened market fluctuations as investors react to political uncertainty, policy proposals, and shifting leadership expectations. However, you can remain calm amidst the turbulence by focusing on long-term financial goals and understanding stock market trends.
In this blog, we’ll examine how presidential elections impact markets, key strategies you can implement to manage volatility, and practical tips to remain calm during an unpredictable time.
Historical Impact of Elections on Markets
If there’s one thing you can count on during election years, the market will fluctuate. Over the last 75 years, U.S. stocks have averaged returns of 9.1% in election years. Potential policy changes and the overall uncertainty of the political climate can increase market volatility.
There are two main periods where stock markets often fluctuate:
- Pre-Election Volatility: Markets tend to respond to anticipated election outcomes with caution. Uncertainty over key issues, like tax policies or regulatory changes, can dampen investor confidence, leading to short-term declines.
- Post-Election Reactions: After the results are known, markets often adjust quickly. In some cases, they may rally, especially if the winning party is perceived as business-friendly or if there is clarity on previously uncertain policies.
No election year is identical, but history has shown that presidential elections don’t have a lasting impact on the stock market. Many other events, like inflation, are more likely to impact stock market returns in the long term.
Understanding Market Volatility During Election Years
Political uncertainty is a natural driver of market volatility during election years as investors try to anticipate the future of fiscal policies, international trade, and regulations. For example, in 2000, the drawn-out legal battle between George W. Bush and Al Gore over Florida’s electoral votes extended uncertainty for weeks, causing markets to wobble and fall by 7.8%.
However, it’s essential to remember that while elections can influence the market in the short term, they are just one factor among many. According to Dimensional Fund Advisors, “Over nearly 100 years of US presidential terms, stocks have consistently marched upward regardless of the administration being Democratic or Republicans controlling the White House.” Other forces—like the actions of foreign leaders, interest rates, and technological advances—can shape the market’s path just as significantly.
In the long run, the market reflects not who the president is but the resilience and innovation of companies working to solve problems and serve their customers. Whether it’s Democrats or Republicans in control, historical trends show that markets generally move higher over time, independent of political shifts.
3 Fool-Proof Strategies to Manage Market Volatility
Market volatility can be concerning, especially as the 2024 presidential election looms. Here are three key techniques to safeguard your investments:
- Diversify Your Portfolio
Diversification is the #1 way to protect your investment portfolio. A well-diversified portfolio may include a mix of equities, fixed income, and alternative assets like commodities or real estate to balance turbulent and stable periods. By spreading investments across different asset classes, sectors, and geographic regions, you reduce the impact of volatility in any one area. - Focus on Your Long-Term Goals
The most important factor in staying calm during election-driven market swings is maintaining a long-term perspective. While the short term may be rocky, markets recover over time. For instance, after the market dips preceding the 2008 and 2016 elections, both saw significant recoveries in the following years. Staying focused on your long-term financial goals, such as retirement, will help you avoid rash decisions based on short-term movements. - Stay Informed (But Don’t Believe Everything You Hear)
Staying informed during election years is crucial, but relying on credible financial sources is equally important. Avoid getting swept up in sensationalized headlines or emotional reactions to political news. Instead, focus on reliable analysis from financial experts and stay updated on economic data that matters for long-term market health. When you intentionally look for credible news outlets, you’ll quickly be able to distinguish between actionable insights and unnecessary market noise.
Stay Calm: 3 Tips to Overcome Market Anxiety
- Develop a Solid Financial Plan
A comprehensive financial plan acts as your anchor during turbulent times. By having a clearly defined roadmap for your financial future, you’ll be better equipped to handle market volatility. Incorporate various scenarios into your plan so you can adapt to different market conditions. But always remember to factor in flexibility—whether it’s adjusting your savings rate or shifting to more conservative investments, a flexible plan can help you stay the course. - Avoid Knee-Jerk Reactions
Reacting impulsively to market swings can do more harm than good. Sudden market dips during an election year can prompt investors to panic and sell at the worst possible time. Instead of reacting emotionally, remember the long-term recovery trends after previous elections. Making informed decisions with a cool head is crucial to preserving wealth and achieving financial objectives. - Consult with Your Financial Advisor
Don’t underestimate the role of a trusted financial advisor. Your financial advisor can be a valuable resource in navigating the uncertainties of an election year. By regularly reviewing your portfolio and adjusting your strategy as needed, an advisor will help you stay aligned with your long-term goals. Advisors are obviously a great resource for financial insights, but they can also be a source of reassurance during stressful periods. Take advantage of their expertise to assess potential risks and opportunities that may arise based on election outcomes.
Keep Your Eye on the Prize
Election years can bring heightened market volatility, but staying calm and focusing on your long-term financial strategy is key. By understanding historical trends, maintaining diversification, and seeking professional guidance, you can weather the market’s ups and downs without making hasty decisions.
Remember, while elections may shift policies, markets have a proven history of resilience. Stay informed, stay patient, and keep your eye on your long-term financial goals. You’ve got this!