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How Will The Market Behave In An Election Year?

| July 27, 2016
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The 2016 general election is now in full swing. Donald Trump and Hillary Clinton are fighting tooth and nail as November 8 nears and our nation’s future is decided. Emotions are running high, as the results of this election will have far-reaching consequences, from healthcare to immigration. Those who have money invested in the stock market are particularly nervous, as the unparalleled nature of this year’s election leaves them wondering what is in store for the markets.

Historical Election Year Market Trends1

It is impossible to predict the future, but the past can often provide us with some clues as to what the future may hold. Looking back at history, it is fascinating to see how closely related market cycles and presidential terms are. For the 60 years from April 1942 to October 2002, there were 15 stock market cycles, each lasting about four years, the same length as a presidential term.

Taking a deeper look, bear markets historically occur during the first and second years of presidential terms, while bull markets occur during the third and fourth years. Election years are the fourth of the presidential term. In fact, a bear market defined as a decline in the S&P 500 Index of 15% or more over a period of 1-3 years never occurred during an election year from 1942-2002.

What Causes The Cycles?

Why is there such a direct correlation between political and economic cycles? The simple answer is fiscal policy. The Federal Reserve has gotten a lot of attention as of late for their ability to impact the economy through setting interest rates and controlling the money supply. The executive branch of the government also has their own means of influencing the economy, mainly through taxation and spending.

It doesn’t come as any surprise that politicians have discovered a correlation between the health of the economy and voter satisfaction. Consequently, as an election approaches, the sitting president usually does what he can to improve the economy in order to keep his party in power through the next election. This exercise of fiscal policy to strengthen the economy leading up to an election contributes to election year bull markets.

Once the election is over, the new president gets down to business and economic appearances are set aside. All of the hype and optimism surrounding a candidate’s promises also fades away as they get into office and the realities of governing set in. This is why the first two years of a presidential term are typically slow times in the markets. Then as the presidential term wanes, fiscal policy picks up, carry the markets up into the next election. And so the four-year cycle continues, keeping stride with the presidential election cycle.

What To Expect This Year

I’ll be the first to admit that this has not been a run-of-the-mill election. This year’s political race has been anything but ordinary, to say the least. Some people are blowing things so far out of proportion as to predict complete economic collapse depending on which candidate enters the white house. But does it really that big of a deal?

Looking back to 1900, the data shows that, at least where your portfolio is concerned, it doesn’t make much of a difference which party wins the election2. However, when the end of a second term necessitates the election of a completely new president, the markets are affected and do not perform as well as in other elections3.

So, history tells us that we should expect moderately positive market returns this year which will slow down once the new president takes office. Because of the unprecedented and often unpredictable nature of the 2016 race, investors should be prepared for short-term volatility as well.

What You Should Do

Whether it is an election year or not, stock market investing should always be a long-term investment strategy. Because of the innate volatility of the stock market in general, short-term investing should be done elsewhere. The fact that we are having an unusual election this year should not make a material difference in a sound overall investment strategy built for the long-term. If you keep your eyes on the horizon, this year’s election will be no more than just a small bump in the road, if anything.

If you’re not sure that your investment strategy is reliable in a bumpy market, it is important to get a second opinion from an experienced professional. Also, if the high emotions and sensational media coverage of the 2016 election are getting to you, talking through things with an expert advisor can help calm your fears and keep you from making irrational investment decisions. At Engaging Women In Wealth, we are here to walk with you through these uncertain times. We want to make sure that your wealth is secure, no matter who wins the election in November. If you have any questions or would like to sit down for a portfolio review, please call us today at 858.756.0004 or email [email protected].

About Deb Sims

Deborah Sims is the Principal of Estate Management Group, a wealth management and financial services firm offering comprehensive and customized strategies to help her clients manage their assets and feel confident in their future. Her mission is to serve as her clients’ most trusted wealth advisor through professional knowledge, integrity, and personalized wealth management services. Based in San Diego, California, Deb’s team has offices in Rancho Santa Fe, Old Town, and Del Mar. She invites you to contact her team today to learn more about how they can help you.

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1 https://gbr.pepperdine.edu/2010/08/presidential-elections-and-stock-market-cycles/

2 http://www.kiplinger.com/article/investing/T043-C008-S003-how-presidential-elections-affect-the-stock-market.html#ECpfayA6M0iQEehv.99

3 http://www.marketwatch.com/story/2016-predictions-what-presidential-election-years-mean-for-stocks-2015-12-29

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