Navigating Market Uncertainty: The Presidential Election and Your Investments

As the upcoming presidential election draws near, many investors are understandably concerned about how the results could impact financial markets. It's natural to feel anxious, but history teaches us a valuable lesson: the market's reaction to elections is often less dramatic than we might expect. In this article, we'll explore the potential impact of the election on the investment market and offer some key considerations to keep in mind during this period of uncertainty.

1. The Influence of Partisan Sentiment on Consumer Confidence

It's important to recognize how political affiliation can influence consumer confidence, which in turn, can impact market behavior. Recent data from the University of Michigan’s Consumer Sentiment Index illustrates a stark partisan divide in how people view the economy based on which party holds the presidency.

Data from 12/31/2006 - 10/31/2023

For example, during President Trump’s term, Republican consumer confidence surged, reaching a peak of 127.2 in January 2020, while Democratic sentiment fell sharply. Conversely, after President Biden took office, Democratic sentiment improved, rising to 83.9 by October 2023, while Republican confidence plummeted to 43.1.

This data underscores the importance of understanding that consumer sentiment—and by extension, market sentiment—is often influenced by political preferences. While partisan sentiment can drive market volatility, the broader economic trends are what ultimately guide long-term market performance. Volatility, in fact, can present valuable opportunities. Periods of market dislocation often provide the chance to rebalance portfolios or make strategic adjustments that align with long-term goals, turning uncertainty into a positive force for disciplined investors.

2. The Importance of a long-term strategy

One of the most critical messages for investors during an election year is the importance of maintaining a long-term perspective. Attempting to time the market based on anticipated election results is a risky strategy. Get it wrong, and the long-run opportunity cost to your portfolio could be significant.

Research shows that less than 50% of a presidential candidate's proposed policies are implemented¹, often in a much different form than initially proposed. Therefore, reacting to campaign promises or election results by making hasty investment decisions is unlikely to benefit your portfolio.

3. The historical perspective: markets and elections

Historically, the market's reaction to presidential elections has been relatively muted. While election outcomes are certainly important, other factors—such as the health of the economy, inflation, monetary policy, and corporate fundamentals—tend to have a more significant impact on the direction of financial markets.

Since 1950, the S&P 500 has averaged positive returns under all combinations of government². This suggests that regardless of which party wins the presidency, staying invested in the market has historically paid off. The key takeaway? Don't overthink it. The election may create short-term volatility, but long-term market performance is driven by broader economic factors.

4. Sector-specific impacts: where to focus

While the overall impact of the election on the market may be limited, certain sectors could experience more pronounced effects depending on policy changes. However, we believe it's essential to focus on issues with broader bipartisan agreement, as these are more likely to result in actionable policy changes. Here are our thoughts on a few examples:

• Trade Relations with China: Both parties have adopted a "tough on China" stance, which means tariffs on Chinese imports are likely to remain, or even increase. As an example, this could negatively impact global consumer and technology companies that rely on China for growth.
• Reshoring and Friend-Shoring: There's a growing consensus around the need to build resiliency in supply chains by bringing manufacturing back to the U.S. or to countries with stronger trade relationships. This could benefit the industrial sector, especially companies involved in reshoring efforts. Additionally, the semiconductor industry, a critical component of this new industrial policy, could see increased support.
• Big Tech and Antitrust: While big tech has been under scrutiny for alleged monopoly power, meaningful changes to business models have yet to materialize. Nevertheless, the sector remains under the watchful eye of regulators, and any future policy shifts could impact these companies.
• Energy and Healthcare: There are areas of disagreement between the parties regarding energy policy (traditional vs. alternative energy) and healthcare (drug pricing). However, both energy and healthcare are heavily regulated sectors with established frameworks, making any substantial reforms a lengthy and complex process.
• Interest Rates and Bonds: With inflation on a downward trajectory toward the Fed's 2% target, interest rates could move lower, but that’s balanced with the risk of higher-than-expected rates for longer if government spending continues to drive deficits. The growing national debt, combined with rising interest costs, could add further pressure on rates, as servicing that debt becomes more expensive. This is a key area to watch since elevated interest costs can crowd out other spending priorities, impact fiscal policy decisions, and contribute to market volatility.

5. MANAGing risk and seizing opportunities

Historical data typically shows that market volatility increases leading up to an election but tends to decrease once the results are known. While volatility can be unsettling, it's essential to remember that markets often overreact, both on the upside and downside. Our approach is to remain vigilant and ready to shift portfolios for temporary dislocations, manage risks, and pursue opportunities that may arise.

Generally, we don't believe in making significant changes to portfolios in anticipation of the election. We think one of the biggest risks to a portfolio is making a drastic shift in strategy out of concern over short-term election outcomes, only to struggle with when to re-enter the market. Historically, investors who move to cash in such situations often miss key recovery periods, leading to lost opportunities for growth. Our goal is to design portfolios to be resilient and stress-tested against various scenarios, including elections, keeping them aligned with long-term goals.

6. reassurance during election season

It's normal to feel anxious about the potential market instability due to the election. However, our portfolios and long-term financial plans are designed with the aim to withstand uncertainty. We emphasize that market volatility is a natural part of the investment landscape and something we believe we’ve planned for.

Even in the face of uncertainty, markets have performed well under all combinations of government. By focusing on what truly drives markets—such as the economy, corporate fundamentals, and market valuations—we can identify potential opportunities in every type of market environment.

conclusion: stay the course

As we approach the election, it's important to validate the feelings of concern that many investors have while also providing reassurance. We believe the impact of the election on your investments is likely to be much smaller than you might think. Our strategy is to stay the course, maintain a long-term perspective, trust in the resilience of your portfolio, and look for opportunities to optimize further.

In the end, presidential elections are just one of many factors that influence the market. By focusing on a disciplined, long-term investment strategy, you can navigate the uncertainty of election season with confidence. Additionally, businesses, particularly those publicly traded, are consistently under pressure from the market to perform. This means that regardless of political shifts or other external factors, business leaders must remain vigilant and innovative to sustain and grow their companies. Combining these approaches helps both investors and businesses weather uncertainties and continue moving forward strategically.

1: https://www.uni-stuttgart.de/en/university/news/all/Election-promises-and-their-implementation/
2: https://www.fidelity.com/learning-center/trading-investing/election-market-impact