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Don't Mix Election Politics with Investing

By Kate Warne September 12, 2018

Building columns with American flag and U.S. Capitol building in background

Has rising market volatility made you more cautious? Or are you concerned about this fall’s midterm elections and the possibility of more policy changes ahead? Selling stocks in reaction to election uncertainty has been the wrong move in the past – making it important to keep election politics out of your investment portfolio.

Tariffs, trade disruptions and many other federal policy changes have intensified the focus on November’s elections. Changes in government policies can have significant effects on investment returns, but they’re much more difficult to predict than you might think. 

While elections tend to put the spotlight on potential policy changes, the outcome could be gridlock rather than bigger changes ahead. Instead of changing your investments based on your hopes or concerns about the election outcomes, determine your strategy based on your situation and goals, and stay invested despite short-term political uncertainty.

The market is more powerful than politics

You may be surprised to learn that stocks, government bonds and the economy have all risen regardless of which party controlled the White House and Congress. The table below shows how they’ve fared under a variety of combinations.

Performance chart

Source: Ned Davis Research, 3/4/1901–10/31/2017. Copyright © 2017 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. Stock returns are average annualized returns beginning in 1901 and include reinvested dividends. Bond returns begin in 1925 and are total returns. Past performance is not a guarantee of future results. An index is not managed and is unavailable for direct investment. Dividends can be increased, decreased or eliminated at any point without notice. Congress is represented by the majority party – party with average percentage control in the House and percentage control in the Senate greater than 50%.

Although the fall elections are important, the decisions you make about your investments matter more. A strategy of staying invested in a portfolio of stocks and bonds worked every time despite the differences in returns based on who held power in Washington. Make sure your portfolio has the right mix of stocks and bonds for you, based on your comfort with volatility and long-term goals, so you can follow that strategy successfully.

Global worries raise volatility

In addition to U.S. elections, global political uncertainty has raised market volatility back toward normal levels. Most concerns have centered on higher tariffs and trade disruptions. Tensions with China, as well as U.S. allies, have been rising on many fronts. And other political worries include Brexit (the U.K.’s exit from the European Union) and European election results.

Trade disruptions and global tensions could slow global growth and continue to trigger pullbacks. But the longer-term outlook remains positive, based on our expectations for solid economic growth with double-digit earnings growth in the U.S. and continuing modest economic and earnings growth globally.

Don't let election jitters keep you out of the stock market

Before and after past midterm elections, stocks have gained on average:

  • Pre-election gains – Stocks have outperformed in the two months before elections in the past. The S&P 500 returned 1.8% on average in September and October in past midterm election years.
  • Post-election gains – In the last two months of the year, stocks returned an average of 4.7% in midterm election years. That’s better than the average year-end rally, when investors start to look forward to the following year.*

Make sure you aren’t mixing election anxieties into your portfolio, reacting to the uncertainty and potentially slowing rather than enhancing your progress. Keeping a long-term focus can help put any short-term worries in perspective.

Important Information:

*Source: Morningstar Direct. Stocks represented by the total return of the S&P 500 Index. An index is unmanaged and is not available for direct investment.

Past performance is not a guarantee of future results. Investing in equities involves risks. The value of your shares will fluctuate, and you may lose principal.
Diversification does not guarantee a profit or protect against loss in declining markets.

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