Are Markets Political?
With the mid-term elections taking place today, it felt timely to discuss the impact politics can have on the markets.
We often meet with clients whose confidence in the market is influenced by whether their preferred party is in office. While it is understandable to feel this way, I want to offer some other ideas to consider.
Yes, elections have consequences and yes, they can create periods of market volatility. The key is remembering that election-related volatility tends to be short-term.
Here are some figures to consider:
- The average rate of return in a mid-term election year is 4.7%, which has historically lagged non-election years.
- The average one-year return following a mid-term election is 15.4%, compared with an average of 7.8% across all other years.
- Historically, markets have been positive roughly 95% of the time in the year following a midterm election.
Why does the market often perform well following an election? One reason is that businesses value certainty. Once an election is over, businesses have greater clarity about the political environment and can begin planning accordingly, no matter who is in power.
Ultimately, business fundamentals such as earnings and growth are the most important drivers of stock prices. While politics can influence the market in the short-term, it is only one of many factors that affect long-term investment performance.
Politicians often receive too much credit when markets perform well and too much blame when they perform poorly. Rather than allowing election results to dictate your investment strategy, focus on what you can control. Create a plan, implement it, and stick with it.
If you do not have a financial plan or would like to discuss how elections and market volatility may affect your financial situation, please give our office a call. We would be happy to help.