January 16, 2024
Market Indifference: How Presidential Elections Impact Your Portfolio
With the 2024 presidential election coming up, many investors wonder how the outcome could affect their investment portfolios. Historically, there has been a perception that Republican presidents are better for the stock market, while Democratic presidents are better for the bond market. However, statistics shows that the market responds indifferently to which party wins the election.
Short-Term Market Reactions
In the short-term, the stock market may react based on investor expectations and uncertainties around the incoming president’s policies. Markets tend to favor continuity and predictability. Any unexpected outcomes can cause volatility as investors digest the news.
For example, there might be an increase in market volatility leading up to the election if the race is close and the outcome uncertain. Conversely, the market may rise if the incumbent president wins re-election, indicating continuity. However, these initial reactions tend to be temporary. Within a few months, other factors like corporate earnings, inflation, and employment trends reassert themselves as the main drivers of market performance.
Long-Term Market Trends Not Driven by Politics
Numerous studies have shown that over longer periods of time, stock market performance does not reliably differ based on which party is in office. In the chart seen below, Vanguard found a marginal return differential for 60% stock and 40% bond portfolio under administrations of different parties.
This makes sense when you consider what really drives long-term market returns – corporate growth and profitability. Over the long run, corporate and industry fundamentals are far more impactful than who sits in the Oval Office. Presidents inherit these economic conditions and their policies take time to materialize.
Focus on Long-Term Goals
History shows that predicting market outcomes based solely on election results is futile. Market fluctuations surrounding elections are often minor and short-lived.
Rather than making any changes based on election predictions, we recommend sticking with a long-term investment strategy that aligns with your risk tolerance and goals. Some volatility around elections is expected, but markets are resilient and the underlying market fundamentals will persist.
Rest assured that the Rockbridge team will be monitoring conditions closely and we’re always available to discuss how political factors could affect your financial plan.