How Do Presidential Elections Affect Markets?

Adam Reinert of Marshall Financial says investors shouldn’t overthink the outcome.

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Reviewed by: etf.com Staff
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Edited by: Kent Thune

Adam Reinert, chief investment officer and chief operating officer at Marshall Financial in Doylestown, Pa., has studied enough election cycles to know what investors can and should focus on.

Jeff Benjamin: How much should investors be worried about presidential elections?

Adam Reinert: Having experienced five election cycles here at Marshall, I’ve seen firsthand how the uncertainty can be stressful, especially for those passionate about the candidates. However, we believe that elections only matter to your portfolio to the extent that you let them.

It’s crucial investors avoid letting personal political views cloud their investment judgment.

Historically, the market has shown remarkable resilience through numerous dramatic political events over the past 50 to 70 years, such as the JFK assassination in 1963, Nixon’s resignation in 1974, and the Bush-Gore election results in 2000. While these were significant historical moments, they did not trigger major market moves.

JB: What kind of impact do elections have on the markets, in general?

AR: Broadly speaking, not much. This might seem like a dull answer, but let’s break it down. Since 1950, only two presidents who served at least one full term experienced negative markets: Richard Nixon and George W. Bush. Nixon’s resignation cut his second term short, and Bush’s presidency was marked by the unwinding of the dot-com bubble, September 11th attacks, and the 2008 financial crisis.

Regardless of who occupies the White House, market volatility and drawdowns have historically proven to be inevitable. Every presidential administration since Eisenhower has faced double-digit market declines, with the average S&P drawdown for presidents serving at least one full term being about 25%.

We believe historical market data supports the principle that investors should stay invested irrespective of which party wins the White House. Since 1950, those who remained invested through all administrations significantly outperformed those who only invested when their preferred party was in office.

JB: How much do election cycles affect investor psyches?

AR: This is challenging to measure directly, but it’s reasonable to assume some impact, especially in swing states with heavy ad spending. Investors often talk about the Trump trade or Harris trade, expecting certain stocks or sectors to perform a certain way based on candidates’ proposed policies and beliefs. However, this strategy isn’t foolproof.

For example, many considered former President Trump to be pro-energy compared to President Biden and Vice President Harris, given the campaign slogan ‘Drill Baby, Drill.’ Yet, from Trump’s inauguration in 2017 to Biden’s inauguration in 2021, the S&P 1500 Energy sector declined about 32%. Conversely, so far during the Biden administration, the same sector has advanced more than 147%. This helps illustrate that economic forces beyond a president’s control remain crucial, even if a presidential administration is perceived as market or sector friendly.

We believe this is a massively important concept, so I’ll reemphasize: economic forces are likely more important for investor portfolios than friendly policies.

JB: How can investors filter through the campaign and advertising noise?

AR: Swing states are experiencing heavy ad spending leading up to the election. According to data from the Financial Times and AdImpact, the Trump and Harris campaigns have spent a combined $349 million on ads in Pennsylvania, with Michigan seeing the second-highest spending at over $213 million.

Despite these large numbers, it seems unwise to read too much into campaign promises. As I mentioned earlier, in the short-term, elections only need to be stressful for investors to the extent that they let them. 

To avoid being swayed by short-term political noise, investors should continue to focus on the long-term. Additionally, it may be best for investors to focus on policy knowns, while being flexible in adjusting to new legislation that gets passed.

Take for example the Tax Cuts and Jobs Act. While both presidential candidates seem to support some type of extension or modification of the TCJA, several provisions are set to expire at the end of 2025 unless new legislation is passed. Accordingly, investors could be better served understanding how they may be impacted by expiring TCJA measures than worrying about short-term political or market noise. 

JB: Is there anything unique about this election cycle that could impact markets?

AR: One concern I’ve heard about this election is the potential for a black swan event in markets. However, this seems unlikely since, by definition, black swans are unforeseen events.

What feels more likely is that the election could be a source of market volatility. Current polling suggests this will be a tight race, so it wouldn’t be surprising if there were no clear winner on election night. Additionally, markets will likely be evaluating House and Senate races to assess potential for legislative and policy impacts.

To top it all off, the next Federal Reserve meeting is just days after the election. Markets will be looking for clues about the strength of the economy and any significant changes that could disrupt current rate cut expectations. It’s possible the Fed could quickly distract markets from the election.

Advisor Views is a bi-weekly Q&A-style series that features voices from across the financial planning industry sharing insights on investment strategy and portfolio management as it relates to the current economic environment.

The format enables advisors to respond in their own words to specific questions designed to provide readers with practical tools and tactics that can be applied to managing client portfolios.

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