Many individual investors are starting to feel anxious and nervous about the upcoming election. Already, the air is thick with speculation and debate. This election is starting out with a lot of turbulence. It seems every week there’s some new pivotal event that sways the course of the election – whether that’s last month’s presidential debate, the assassination attempt on Republican nominee Donald Trump or President Joe Biden stepping out of the race and passing the torch to Vice President Kamala Harris.
It’s hard for the average American to ignore what’s going on in politics right now, especially in the age of social media and today’s digital-news environment. But is all of this affecting how people invest their money? Investors are wondering: should they adjust their portfolios based on election outcomes?
According to a survey by online brokerage Public, 73% of surveyed customers said the election year is not impacting their investing strategy, while only 37% said it is.
Why is that? It’s not that retail investors don’t feel strongly about the election: In a survey by wealth-management platform Betterment, 35% of retail investors said they felt “anxious” about the election, while 22% felt “scared” and 21% felt “excited.”
We’re at the stage where people are anxious about the uncertainty of the election. We are far enough from the election that it’s not worth overly worrying about. Investors should expect that now is the time when the market is going to be volatile until there is certainty of the result. Investors don’t want to be exposed to that volatility, regardless of who’s going to win.
Markets and people alike do not like uncertainty. Uncertainty can make markets especially volatile, which can make retail investors very anxious.
So what’s an investor to do? Should they be adjusting their portfolios with this uncertainty? Well, the short answer is no. Historical data and market behavior suggest that while elections and politics capture public attention, they do not significantly dictate the performance of the stock market.
- Markets have marched upwards regardless of which party controls the presidency.
Historically, the U.S. stock market tends to grow during election years, though its gains are slightly less than the average annual gain for the overall market. So, elections don’t usually result in selloffs.
Furthermore, 83% of presidential terms have had positive stock market returns, averaging 9.5% per year. Only three presidential terms had a negative return and those were due to larger economic issues. For example, the markets declined during Herbert Hoover’s term due to the Great Depression and George W. Bush’s term experienced a decline linked to the 2008 financial crisis. These instances highlight that economic fundamentals, rather than political leadership, play a more critical role in market performance.
Breaking news can affect daily market swings as traders digest what happened and try to position themselves for the future – and election-related news can have this affect, too. For proof of this, look at the “Trump trade” that has gained in popularity these past few weeks as polls have tilted in the Republican nominee’s favor.
Although, active traders do try to capitalize on election news. For example, Interactive Brokers Group Inc.’s (IBKR) most active symbol list showed trading activity in Trump Media & Technology Group Corp. (DJT) surging following the assassination attempt.
- Stocks have also gone up regardless of which party controls Congress.
While actions by Congress might indirectly impact markets via policy, other factors tend to play an even bigger role, such as geopolitical events, interest rate changes and economic shifts.
- Returns in election months are randomly distributed, indicating the winner of the presidency doesn’t significantly impact markets.
Investors might expect some short-term volatility due to uncertainty and speculation, but long-term trends remain unaffected by the electoral process.
However, the retail investors actively trading on election news are usually in the minority. According to Public’s survey, only 16% of investors said they were buying more stocks or options based on who they think will win the election.
Short-term trades may or may not be profitable, but it’s important for investors to know the difference between political headlines that cause market swings and fundamental changes that influence where the market is headed in the long term.
The propensity for retail investors to buy and hold the securities in their portfolio means they are more geared towards longer-term investing. This may also explain why most retail investors haven’t been changing their investing strategies going into the election.
Buying and holding through the market volatility leading into the election may take some resolve, but that’s what retail investors seem to be doing right now.
On the positive side, the election having a set date means that people have an idea of how long this uncertainty will last. In both 2016 and 2020, markets rallied once an election winner was decided.
While it might be tempting to take action in your portfolio based on your view on how the election might unfold, the best strategy is to stay the course with your investments. It is better to focus on political actions you can control, like voting, writing postcards to get out the vote and donating to political campaigns. Try to ignore the volatility and stay with your investment strategy until the election is over. Of course, that’s easier said than done!