On Tuesday, November 8th, after approximately a year and a half of campaigns, our nation will come together to select its new President of the United States. It’s been a difficult and even vicious race all the way through, and it promises to continue to be so up until the very end. But whomever you plan on voting for, there’s one important question you should be asking: How will the 2016 Presidential Election affect the U.S. economy?
How Elections Affect the Markets
Understanding the long term economic effects of choosing a new President is a difficult proposition. Both Clinton and Trump have discussed extensive plans to improve the country’s financial situation. However, how things ultimately play out on the economic stage depends not only on who’s elected, but a number of other factors: how their plans evolve over the course of their term, how receptive Congress is to them, and of course, how well they actually work.
But what about the immediate effects of the Presidential race itself? An election can have a significant impact on the stock market in a number of ways. For one thing, returns tend to be comparatively lower than in non-election years, due in large part to the anxiety over what the next four years could bring.
Additionally, there are certain patterns to the markets in any year, which can become more visible during an election cycle. In autumn, stocks often take a bit of a dive. This happens consistently, but during a Presidential race, the public is keenly aware of any negative changes to the economy, taking them as a harbinger of things to come. And since the fall slump happens so close to the election, it can even sway voters to vote for the non-incumbent party, making the markets even more volatile in the process.
Markets and the Incumbent
The markets are fickle in any election year, but they may fluctuate even more in years when the sitting President is at the end of his second term. If the incumbent is running for reelection, investors know there’s a chance things will remain the way they are for another four years, for better or for worse. However, with two entirely new candidates, the uncertainty over what’s going to happen can create a volatility that carries over to stock prices.
Statistics show that since 1928 companies on Standard & Poor’s 500 index have dropped an average of nearly 3% in every election year wherein the current President wasn’t seeking reelection. In fact, the final year of their second term is often worst financial year, on average, in any Commander-in-Chief’s tenure, and the only one yielding negative returns. On the other hand, in years when our nation’s leader is up for reelection, markets go up an average of 12.5%—significantly higher than normal.
Preparing for Market Volatility
It’s worth noting that these numbers are just a guide based on past market performance. The individual circumstances of any given year can significantly influence the economy in a variety of other ways, which are often difficult to predict. In any event, the main takeaway is that we can expect stocks to be pretty volatile in the coming months leading up to the 2016 Presidential Election—to say nothing of the next four years, which remain uncertain.
If you’re saving for your retirement, these types of market fluctuations can be detrimental to your portfolio. The entire point is to keep your investments stable and grow them over time, to provide you with a solid nest egg to live on once you stop working full time. A sudden downturn could put your entire future in jeopardy.
Is your IRA/401(k) positioned against these types of market changes? What happens to your retirement account if the markets suffer prolonged downturn during the next President’s term of office? And should current events and the trends that follow them affect your investment decisions? These are questions you should talk over with your financial advisor, to make sure your savings are secure, whatever the next election—and all the ones after that—may bring.