With news from the White House and Congress peppering the landscape continually, and the media covering midterm elections that historically might have gotten much less attention, investors are likely wondering, “Will the outcome of the midterms—whatever it is—influence my portfolio?”
The short answer is “probably not,” for several reasons we’ll discuss below. In a nutshell, historical analysis shows that other factors have far more impact on the stock and bond markets than elections.
Election cycle influence. Is it real?
Analysts have examined this issue under a microscope for more than a century, and there is little definitive evidence, either way, for elections having significant influence on the market. Regarding midterms, specifically, the Wells Fargo Investment Institute analyzed the S&P 500 back to 1962 and found that, on average, during midterm cycles stocks see a pullback of around 19% before the election and a rebound of more than 31% afterward.
However—and this is important to note— these average losses and gains happen no matter what the outcome is, or which parties gain or lose seats.
The analysts ascribed the fluctuation to uncertainty, not politics. “It does not matter which party was in charge before or after the midterm election. The removal of uncertainty and of constant media attention allows markets to resume focusing on fundamentals,” noted analyst Craig Holke in the report.
The true market indicators.
According to research by the investment education website Investopedia, “Confidence in the stability of future investments plays a large role in whether markets go up or down.” Events that cause extreme uncertainty, and that Investopedia’s research found play a greater role on the stock market than elections, are:
- Wars or other conflicts
- Concerns over inflation or deflation
- Government fiscal and monetary policy
- Technological changes
- Natural disasters / extreme weather fluctuations
- Corporate or government performance data
As many of us may remember, the largest single-day decrease (7.1%) in the history of the Dow Jones Industrial Average (DJIA) occurred on September 17, 2001. This move is largely attributed to the September 11 terrorist attacks in the United States, which created a lot of uncertainty about the future.
Of course, each election cycle is different, and world and local politics are particularly tumultuous right now. Nothing is set in stone due to—you guessed it—uncertainty. In the final analysis, uncertainty is perhaps the greatest driver of market moves, and it’s one that investors can largely overcome with a sensible investment strategy.
Astute investors succeed by embracing two key realities of the market:
- Paying attention to the fundamentals of growth, earnings and valuations is a winning strategy; scrutinizing the daily news for clues to market shifts is not.
- Taking a long-term view of investments has been proven to pay off, time and time again.
To repeat an oft-cited quote, “Investing should be like watching paint dry or watching grass grow. If you want excitement…go to Las Vegas.”
The foregoing content reflects the opinions of Atlanta Financial Associates, Inc. and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct.
Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns.
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