Is an Election-Based Stock Market Crash on the Horizon?
On Tuesday, after approximately a year and a half of campaigning, our nation came together to select a new president. It’s been a difficult and even vicious race all the way through. But there’s one important question you should be asking: How will the 2016 presidential election affect the U.S. economy going forward?
How Elections Affect the Markets
Understanding the long-term economic effects of choosing a new president is a difficult proposition. Both Clinton and Trump offered extensive plans to improve the country’s financial situation. However, how things ultimately play out on the economic stage depends on a number of factors, including how such plans evolve, how receptive Congress is, and of course, how well the plans actually work.
But what about the immediate after-effects of the race itself? A presidential election can have a significant impact on the stock market in a number of ways. For one thing, returns tend to be comparatively lower than in non-election years, due in large part to investor anxiety over what the next four years could bring.
Additionally, there are certain patterns to the markets in any year that can become more visible during an election cycle. In autumn, stocks often take a bit of a dive. This happens consistently, but during a presidential race the public is keenly aware of any negative changes to the economy, taking them as a harbinger of things to come. Since the fall slump happens so close to the election, it can even sway voters to vote for the non-incumbent party, making the markets even more volatile in the process.
Markets and the Incumbent
The markets are fickle in any presidential election year, but they tend to fluctuate even more in years when the sitting president is at the end of his second term. If the incumbent is running for reelection, investors know there’s a chance things will remain the way they are for another four years, for better or for worse. However, with two entirely new candidates, uncertainty over what’s going to happen can carry over to stock prices.
Statistics show since 1928 companies on Standard & Poor’s 500 index have dropped an average of nearly 3% in every election year wherein the current president wasn’t seeking reelection. In fact, the final year of their second term is often the worst financial year, on average, in any Commander-in-Chief’s tenure, and often the only one yielding negative returns. On the other hand, in years when our nation’s leader is up for reelection, markets go up an average of 12.5%—significantly higher than normal.
Preparing for Market Volatility
It’s worth noting these numbers are just a guide based on past market performance. The individual circumstances of any given year can significantly influence the economy in a variety of other ways that are often difficult to predict. In any event, the main takeaway is that we can expect stocks to be pretty volatile in the next few months.
If you’re saving for retirement, these types of market fluctuations can be detrimental to your portfolio. The entire point is to keep your investments stable and grow them over time, in order to provide you with a solid nest egg to live on once you stop working full time. Thus a sudden downturn could put your entire future in jeopardy.
Is your IRA/401(k) positioned against these types of market changes? What happens to your retirement account if the markets suffer prolonged downturn during the next president’s term of office? And should current events and the trends that follow them affect your investment decisions? These are questions you should talk over with your financial advisor, to make sure your savings are secure, whatever the election—and all the ones after that—may bring.