How to invest during an election year?

Post-Election Market Trends: Analyzing the Rally Phenomenon

by Jeremy Reif, CRPS

One of the most frequently asked questions during an election year is, How should you invest during an election year?  History tends to repeat itself, so the best answer is to research what has happened in previous election years.  Markets during election years can exhibit a variety of behaviors, influenced by uncertainties and expectations related to the potential policy changes that might come with a new administration. Here are a few general trends and considerations:

• Volatility: Election years can bring increased volatility to the stock market as investors react to the uncertainties associated with potential changes in government policies, tax laws, and regulations that could affect businesses. History shows that volatility tends to be more pronounced the closer it is to the election. Social media, TV, and radio paid-for advertisements make investors worry about who might be elected next.  A great example would be, will the new president is for or against oil and its production and exploration of natural resources.  Investors might sell their positions and wait to see who is elected before reallocating their assets.
• Historical Trends: The U.S. stock market has often experienced a generally positive trend during election years, but not always.  This is potentially due to optimism about proposed policy changes discussed leading up to the election or the resolution of uncertainties. For instance, the S&P 500 has generally yielded positive returns in most presidential election years since World War II. Oftentimes, the positive return is what is called the election rally. Once the markets know who is elected as the incoming president, the markets reposition their assets based on what they believe are the new government policies, tax laws, and other regulations that could affect business.
• Sector Sensitivity: As mentioned before, some presidential candidates will openly discuss their beliefs on things such as oil and natural resources. Some sectors may be more sensitive to election outcomes than others. For example, industries such as healthcare, energy, and Finance might be particularly reactive to changes in policy direction signaled by different candidates’ platforms.
• Pre and Post-Election Performance: Market performance can vary significantly in the months leading up to and following an election, often settling down once the election outcome is clear and market participants gain a better understanding of the future policy environment. Markets can do well Q1, Q2. As uncertainty becomes more chaotic Q3 tends to be volatile and therefore ripe for losses. Q4 usually continues Q3’s trend until the election.  History also tells us that post-election no matter who is elected, the markets tend to rally because investors can plan for more certainty for the next four years.
• Long-Term Impact: Over the long term, the impact of an election on stock markets tends to be overshadowed by broader economic factors such as economic Growth, interest rates, and global economic conditions. The last few years have been drastically overshadowed by inflation issues and the rising interest rates.

Why does the stock market tend to rally after elections?

Investors need to consider that while elections can bring short-term volatility, investment decisions should ideally be based on long-term fundamentals rather than speculative, short-term predictions related to political events. Diversification and a focus on personal investment goals and risk tolerance are key to managing through periods of uncertainty, including election years. A rally after an election can be attributed to several factors:

• Future Certainty: One of the primary reasons markets might rise following an election is the resolution of political uncertainty. Markets dislike uncertainty. During uncertainty, investors sit on the sidelines to avoid it and wait to redeploy their assets when certainty seems more prevalent. The Clarity that comes with knowing the outcome of an election can lead to increased confidence among investors and in the political agenda. This can result in more buying activity, pushing stock prices up.
• Policy Changes: As mentioned before, investors often react positively if they believe that the incoming administration will implement business-friendly policies, such as tax cuts, deregulation, or increased spending on infrastructure. It does not matter if the new president is democrat or republican, as each party can have positive effects in different areas of the markets. These expectations can drive optimism in the markets.
• Sector-Specific Impacts: Depending on the election’s outcome, certain sectors may anticipate more favorable treatment. For instance, renewable energy stocks might rally if a more environmentally conscious candidate wins, or defense stocks might rise if the elected candidate favors increased military spending.
• Global Market Reactions: 2008’s recession taught us that US Economy is very much indeed tied to the rest of the world. President elect and their global policies will have a dramatic influence. Stability and policy direction of major economies like the United States can influence global market sentiment. A perceived stable outcome can attract foreign investment, further boosting stock markets.

Overall, the post-election market rally often reflects a combination of relief over the end of uncertainty, optimism about future economic policies, and historical market behaviors that influence investor psychology.

Originally Published on https://pointwealthmanagement.com/blog/

Jeremy Reif CRPS®

Just like the majority of you, family is where it matters most. For me, it all started when I was young. Like many, my parents played a large role in who I am today. I was fortunate enough to have a family that tried to teach me about the world of finances. This is where I feel that the public school systems tend to fail our society; rather than make mistakes with money and try to learn from the mistakes, I was able to avoid them. I was and still am enamored with finances and economics. Maybe it is a Midwest type of thing, as I am passionate about helping others succeed with their own finances. I hope you find my articles and videos as helpful as my clients have.