How midterm elections impact the stock market

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Politics is personal. So is investing.

But these two things should not be mixed if you are investing for long term.

Yes, the stock market does not like uncertainty. A day after this week’s midterm elections, with so many races still undecided, the benchmark S&P 500 fell 2.1 percent. The Dow Jones industrial average and the technology-intensive Nasdaq also fell sharply. And control of both houses of Congress remained in limbo at week’s end.

But still — don’t let post-election panic drive your investment decisions.

“Whether it’s a presidential election or a midterm election, politics tends to encourage investors to unhelpfully color their opinions,” said Dan Egan, managing director of behavioral finance at Betterment, a digital investment advisory firm. “The more partisan someone is, the more likely they are to believe that electing the opposite party will significantly hurt the stock market.”

I asked Egan more about investing during an election year. Here’s what he had to say.

How do elections affect the stock market?

“A close race between very different candidates presents the biggest uncertainty,” Egan said.

Still, regardless of who wins, the stock market is generally bullish when things settle down.

“Elections rarely seem to have a big impact directly on stock markets,” he said. “It is difficult to distinguish between normal market ups and downs and attribute any movements directly to the election results.”

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Where is the economy headed? To quote the Fed chief: “Hard to say.”

How does politics adversely affect investor behavior?

Short-term decisions based on election results could create fear long-term market decline for some investors.

“When voters have a strong preference for one political party over another, it creates a bias toward what they’re doing as right,” Egan said. “If your party has a bad election night and you pull out of the markets because you think things are going to take a turn for the worse, you’re pulling out at a time when market uncertainty is going down, which the market likes.

Many factors affect the performance of markets, and people generally overestimate the influence of politicians, especially in the long term.”

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How can reacting quickly to election results hurt performance?

Panic selling because your favorite politician didn’t win or the political party didn’t dominate is likely to hurt your investment performance because of the time you spend out of the market, Egan said.

“Markets tend to go up in the short term over the medium term,” he said. “Missing even a few of the best market days of the year can completely crush your overall returns.”

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From 1993 to In 2013, the S&P 500 had an annual return of 9.2 percent, he said. “However, if you only missed the top 10 market days during that time period, your annual returns would roughly be cut in half, or 5.4 percent.”

Don’t rely on the usual post-midterm stock rally

What is the historical performance of the markets over the medium term?

Temporary turbulence in the stock market, for example on election day, can be frightening some investors for sale. That would be a mistake, Egan said, pointing to reports from Vanguard and US Bank.

Vanguard’s research, which goes back to 1860, found that the compound annual return for a portfolio of 60 percent stocks and 40 percent fixed income performed about the same whether a Republican or a Democrat was elected president.

“Some may assume that one political party can have a better impact on market performance than the other, but the evidence and historical data show that this theory also falls flat,” wrote Aviva Miller, a financial advisor at Vanguard Personal Advisor Services.

“Ultimately, long-term investment success does not rely on short-term market developments,” Miller wrote. “Instead, it’s more important to have a well-balanced, diversified plan that you hold for the long term.”

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Bank of America report, prepared before Tuesday midterm elections, he asked: Does history provide investors with guidance on what? What can the election results mean for markets and the economy?

Analysts studied Bloomberg shares of market data over the past 60 years, covering 15 midterm elections, and found that the S&P 500 “has historically outperformed the market in the 12-month period following midterm elections, with an average return of 16.3%.

Is there anything people should do when the dust settles?

Stocks they fell immediately after Donald Trump’s 2016 presidential election, but then rose sharply at the end of the next trading day.

The market factors in what impact he thinks certain policy decisions could have, and that often leads to positive stock performance, Egan said.

If you’re still concerned about your portfolio, talk to your financial advisor to reassess your financial goals, progress and risk tolerance.

“At times like these, it might also be a good idea to log off of social media and disconnect for a few days,” Egan said. “You won’t miss the important stuff, but you’ll avoid a lot of ephemeral stress.”

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