Why the US election is nothing to worry about...
Luke Abbott, CFA
Helping professionals across LATAM make informed investment decisions for their individual financial goals.
Every election cycle, I hear the same nervous statements, something about markets crashing, crazy volatility, possibly even the end of the world.
But what has happened in the past, and should this stop you from investing now?
Please note that I won't be getting political here. If you want to hear that, you'll have to buy me a beer, maybe three.
First of all, no. There is a US election every four years. Are you not going to invest 25% of the time just because there is an election?
And secondly, yes, I am focusing on the US. This is because US equities make up around 60% of the global stock market. So it's essential to pay attention, please listen up.
Now, don't get me wrong, elections can be stressful times, especially with what happened with Trump over the past weekend. It makes sense that this should impact the stock market, perhaps negatively.
Luckily for us, this has been studied extensively, and in terms of pure numbers, election years actually deliver a slightly higher return than non-election years on average.
2008 was the most recent election year in which the market had a negative return. However, that may have had more to do with the global financial crisis than Obama's first-time election victory.
And don't worry—I'm not picking on Democrats. Market returns over time have actually been higher (very, very slightly!) under Democratic leadership than that of Republican leadership. Many think this has more to do with timing, with Democrats tending to be elected following times of crisis as they are seen as the safer bet. A good example would be during a recession when people are more likely to vote in favor of higher unemployment protection.
The most important consideration is that we all have our own political biases, and we tend to think that our favored candidate will positively impact stock prices while the opposing candidate would have the opposite effect.
Luckily, those supporting the other candidate also think the same, just in reverse,
So when we have an election, especially in the US, where everything seems so partisan, and the country appears almost split down the middle. You need to realize that regardless of who wins come November, 50% of the country will see this as good, and 50% of the country will see it as bad.
These opposing viewpoints cancel each other out, and the market continues to function normally, as if by magic.
There is a slight uptick in volatility in the months leading into an election, especially tight ones, but this volatility calms down substantially once a winner has been announced.
One thing the market hates is uncertainty!
Apple, Amazon, and Microsoft will continue to make hundreds of billions of dollars annually, regardless of who is in power. When investing in the stock market, we invest in industry titans.
The stock market is not the economy, and while they are often correlated, they sometimes like to head off in separate directions.
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In 2020, the year of Covid, with unemployment through the roof and economies in tatters, the S&P 500 had a positive return of 17%.
At the end of the day, the stock market will do what it always does.
Investors will be rewarded for taking a long-term view of the market and continuing to invest over time, regardless of what is happening around them.
If you want to discuss this or your personal situation in more detail, please feel free to book a free discovery call using the link below.
Luke Abbott, CFA