Prepare clients now for an emotional election year

With the 2024 presidential election on the horizon, investors may become increasingly concerned about the ramifications of an election on their portfolios. Strong emotions are likely to come out as the campaign season evolves, with proponents of each political party firmly believing that the opposing party’s candidate will harm the broader economy and the stock market. Like market volatility, investor emotions are often heightened during an election year, causing investors to question the impact of elections on their financial goals.

The accompanying chart shows that stocks have historically performed well, irrespective of which political party holds the presidency. It can be argued that the stocks’ historical performance has come from a confluence of variables (e.g., company earnings, profit margins, innovations, the business cycle) over a long period.

Allocating investment dollars based on which political party is in power or which party an investor may hope will win the next election is akin to market timing. Suppose an investor chooses not to invest in the stock market because of existing political biases. In this case, market timing can be costly in terms of missing opportunities to capture returns, opportunities that are agnostic to which political party holds the Oval Office.

Also, remember that the stock market dislikes uncertainty, and elections generally contribute to uncertainty. But as the chart shows, maintaining a long-term perspective and avoiding irrational investment decisions is likely to benefit investors in the long run, regardless of whichever way the political winds blow. For some politically inclined investors, it may be natural to feel that the party they support will deliver the best economic outcomes. For example, a recent Nationwide Retirement Institute survey found that around one in three (32%) investors believe the economy will plunge into a recession within 12 months if the political party they least align with wins more power in the 2024 federal elections.

Yet, history tells us that these instincts can be blown out of proportion. Investors should remember election results in either party’s favor have historically had little impact on future investment returns. That’s why it’s important to apply a strong filter to election news coverage to maintain an objective understanding of the events shaping our world and stay focused on the fundamental drivers of investment performance (e.g., company earnings, revenue growth, profit margins, etc.)