Presidential Elections and the Stock Market
With the elections coming up, many investors are concerned about the presidential election and the stock market.
There’s uncertainty in the air. And the market doesn’t like uncertainty.
So, what do you do with your hard-earned money in the meantime?
Before you make a move, check out this video interview with 401(k) Maneuver’s CEO and founder, Mark Sorensen, to find out what you need to know about the elections and the stock market.
Here’s what you need to keep in mind with presidential elections and the stock market.
What Effect Do Presidential Elections Have on the Stock Market?
There has never been a bull market start or end because of a presidential election.
In the short term, presidential elections can create some volatility, but longer term, elections haven’t really mattered in the pricing of stocks and how they’re valued.
“Keep in mind that the market looks ahead 6, 9, 12 months,” says Sorensen. “If the market was overly concerned about the presidential election and who would win, it would already be telling us that in its action today.”
What Past Elections Show Us
According to Sorensen, if history is any guide at all, the U.S. economy and the stock market will be just fine in the long run – no matter who gets elected.
In fact, 19 of the last 23 election years – from 1928 to 2016 – the market was up.
Whether down or up, it’s not so much the election itself that affects the markets, but rather how the economy is doing overall and the current business cycle.
For example, when Obama was running against McCain, the market went down 37% that election year. But that was 2008, and we were in the middle of a housing and financial collapse that came to be known as the Great Recession.
During the year of the Reagan-Carter election, the market went up 32.8%.
However, this was not because of the election. 1980 was the beginning of one of the best bull markets we ever had in the history of the country.
Let’s take a look at what’s happened with presidential elections and the stock market since 1980.
Ronald Reagan: In 1980, when Reagan was running for president, critics were concerned he had no experience, and, because he was belligerent toward the former U.S.S.R., he would draw us into nuclear war. They even thought his economic package, now known as Reaganomics, was dangerous and wouldn’t work.
However, during his two terms, the growth of the economy (GDP) grew at 3.5% a year, and the market was up an average of 14.2%.
George Bush: In 1988, when George Bush senior was running, they said he wasn’t a strong leader and that he lacked vision. They said that he was part of the Reagan administration that doubled debt.
Yet the economy still grew 2.2% a year, and the market averaged 15.7% a year during his administration.
Bill Clinton: During his first presidential campaign, critics said he was a small-state governor who was unproven on the national scene. They were worried about him increasing taxes and sinking the economy. They were worried about a takeover of healthcare, price fixing in pharmaceuticals, and that a Clinton administration would nationalize as much as 20% of the U.S. economy.
However, during his 8 years in office, the market grew over 17% a year, and the U.S. economy grew at 3.9% a year GDP.
George W. Bush: In 2000, critics were worried about tax cuts only being for the wealthy and that he had no foreign policy experience.
During his two terms, the economy continued to grow. However, the market did not do well over his presidential term. This is in part due to 9/11 and the bear market that started in 2000.
Barack Obama: People were concerned he had only two years as a senator and that he was very inexperienced. Critics were concerned about Obama passing large stimulus bills and a healthcare plan that they thought would explode the national debt.
The economy didn’t grow as fast because we were coming off of the Great Recession, but it still grew at 1.6% a year, and the market averaged over 14% a year during his time in office.
Donald Trump: During his 2016 campaign, people were concerned he had never held a political office and he didn’t speak or act in a way that is presidential. At the time, critics were worried about the trade war with China and how that might damage the U.S. economy.
Yet in the last 4 years, the economy has grown at 2.5% a year and the markets have averaged over 12% a year.
If You Are Close to Retirement
If you’re close to retirement, you likely don’t have all your money in the stock market, but have a portion invested for long-term growth and to keep up with inflation.
“It’s a matter of safety versus risk and asset allocation,” explains Sorensen. “I think, in the short term, whatever volatility persists will be pretty short-lived.”
It’s important to remember that you are an investor, which means you have a longer time horizon.
Sorensen shares that, in his 38 years of experience, when people try to time and trade the market, it often ends up being a zero-sum game.
“We’ve had some clients ask, ‘Should I get out of the market until after the election?’ That creates a situation where you have to make two perfect decisions. If it goes down, you get scared and think it’s going to go lower, so you don’t get back in. Then, when it goes up, you’re having to suffer the opportunity cost of getting out in the first place.”
“The fact is that there are going to be short-term times when the market gets volatile and scares you a little bit, but longer term, it’s going to do fine.”
The key is to put yourself 6 months out. Yes, there may be some volatility because of the election, but again, there has never been a bull market start or end because of a presidential election.
“You can’t guarantee anything in the stock market, and yet I can say that, 100% of the time, historically, the market has always come back from any correction or any bear market. You just have to be patient.”
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