Investing 101: the U.S. election and the financial markets
Every time an election rolls around, voters, politicians, and pundits alike try and predict which candidate will come out on top.
With each new cycle becoming more prolonged and polarized than the last, U.S. presidential elections have grown into momentous global events. Thanks in part to every off-the-cuff comment, speech, flub, and tweet being captured, viewed, and vigorously dissected in real time.
But what kind of impact do U.S. presidential elections have on financial markets?
Well, they cause volatility for starters. The level of which can depend on a variety of factors, including whether polling suggests a victory for the incumbent or if it’ll be the challenging party that ultimately prevails. While a change in administration can be a positive thing, it can also create a wave of uncertainty, since a brand new president usually brings about untested changes in policy, economic strategies and/or international relations.
And when there’s uncertainty, investors tend to be more cautious.
That’s because people are naturally averse to risk. Especially when there are too many unknown variables and large sums of money involved. Add a U.S. presidential election to the equation and you could also end up with more pronounced market fluctuations impacting sectors that may directly or indirectly tie into either candidate’s proposed policies.
For example, Candidate A might have ‘fighting climate change’ at the top of their agenda.
In turn, this environmental focus could cause a positive spike in renewable energy stocks. While on the flip side, traditional sectors being touted by Candidate B, such as oil and gas, could be negatively impacted—and vice versa.
Here at home, the U.S. election could also have a ripple effect on Canadian markets.
After all, there are significant economic ties between our two countries.
Case and point, approximately 78% of Canada’s merchandise exports travel to the United States, while nearly half of our imports come from our neighbour to the south.
In addition, roughly 30% of revenue generated by companies in the S&P/TSX Composite comes from the U.S—a country that also happens to be our largest source of foreign direct investment (FDI) and the top destination for Canadian investment abroad.
All that to say when ‘the going’ in the U.S. financial markets get tough (particularly during an election year), Canada is almost sure to feel it.
But history has also shown that we can handle it.
In fact, both markets have tended to thrive in the aftermath of voting day, with Canadian and U.S. key stock market indices typically performing above their long-term averages in the 12 months following a presidential election.
One big question that also seems to float around every election cycle pertains to party lines.
Specifically, does the performance of the stock market change for better or worse depending on whether it’s a Democrat or Republican elected to the White House?
The short answer is, not really.
While that might not seem very definitive, historically speaking, there have been minimal differences in market performance fresh off the heels of either party being voted into power.
With that said, there are some interesting patterns worth pointing out.
For instance, fresh out of past U.S. presidential elections, the S&P 500 tended to respond more favourably to a Republican victory.
But why is that?
It could simply come down to perception (i.e. that Republican policies were viewed to be more conducive to business and achieving the American dream, whereas Democratic policies could be perceived to more strongly favour social issues).
Party lines aside, if the newly elected president (or incumbent) is viewed as being pro-business, then naturally the stock market may react in kind by going through a surge. On the other hand, if that person has priorities that are not business-focused, then that viewpoint may trigger a market slump instead.
Volatility aside, major market corrections are seldom tied directly to election cycles or outcomes.
Instead, index performance is typically impacted by broader factors such as domestic and global economic conditions, commodity prices, and external disruptions (which build up over time and are less predictable than election dates).
Translation: don’t let all of that election drama derail you from the big investment picture.
While monitoring developments (on the election front) can be beneficial when it comes to staying on top of overall market sentiment leading up to the big day, elections come and go—as does market volatility.
Your financial goals, on the other hand—well, those are a commitment made for the long haul.
That’s why it’s best not to react (or overreact) based on short-term noise during U.S. presidential election cycles (i.e. by deciding to sit on the sidelines or putting your money into cash savings).
Instead, stay invested and remain focused on the long-term.
Of course, when it comes to your money, that’s sometimes easier said than done.
Just remember, however, that if you’re ever in any doubt on whether your investment plan is still on track, you can always reach out to your financial advisor.
Want to make sure your portfolio is solid during an election year and beyond? Let’s talk.
No matter where you are on the pay grid or what your pension income is like in retirement, we can work with you to ensure your investments are on track to achieving your financial dreams and goals.
