Election Warning: Mix Politics, Portfolio at Your Peril

Perhaps no factor contributes more to market volatility than uncertainty. What the markets don’t know about tomorrow can lead to big swings in stock prices. That takes us to the tension that a presidential campaign can bring to markets, to you and to your portfolio.

“There probably are an endless variety of campaign-related actions that can move the markets quickly, from a shift in the polls to an unintended debate misstep,” said Joe Correnti, senior vice president of brokerage product. “And the markets are on guard for all of them, although these types of events typically don’t have a long-term impact on the markets.”

Don’t Panic Over Election Volatility

The worst reaction for investors, Correnti said, is panic.

“If you’re a long-term investor, the volatility from an election campaign shouldn’t be viewed any differently than any other event that might cause quick, troubling moves in stocks,” he said. “Declines are a normal part of market movement. The key is to have a long-term plan and stick to it.”

Presidential election years historically have been mostly positive, according to research from S&P Global Market Intelligence. The S&P 500 has gained an average of 6.1% during the fourth year of a presidential term since 1948. The market has been positive in 76% of presidential election years.*

But historical averages might not reflect what will happen the rest of this year or other election years to come. In addition, even if the market closes higher this year, there could be a plenty of gyrations between now and Dec. 31. Short-term volatility remains a possibility as the markets try to anticipate or speculate which candidate has an edge.

The best rule of thumb, Correnti said, is to divorce politics from your portfolio.

“You can’t control what will happen to the markets before or after Election Day,” Correnti said. “But you can control your investment plan. Buying or selling solely based on how a particular candidate is performing during the campaign could end up damaging your investing plan and your portfolio.”

Stick to Your Investing Strategy

So what about the day after Election Day, when you know for sure which candidate will be the next president? The past provides little help. Studies show that there is very little difference in market gains based on presidential party affiliation. But again, the past is not necessarily prologue. It’s possible that the president’s party and stock market performance will become closely correlated over the coming decades.

The bottom line is that no one really knows what will happen with the markets based on the 2016 presidential campaign or its outcome.

“All we can say today is that the stock markets have been generally apolitical,” Correnti said. “So it might make sense for investors to fight the urge to make portfolio decisions based on party politics. They would likely be better off to stick with an allocation of assets in their portfolios that matches their goals and the amount of risk they’re willing to take.”

Next Step: Concerned about big market swings? Check out Don’t Fear Market Volatility, Prepare for It.

*Source: S&P Global Market Intelligence, Sector Watch Dec. 7, 2015.

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