For the past month or so I have fielded questions from clients and others about how the Presidential election will affect the U.S. stock markets. I normally don’t forecast the short-term direction of US stocks. But considering the unusual nature of this election cycle, I felt it necessary to make an exception to my rule.
After considerable thought and analysis, I have determined that one of three outcomes is likely to happen in the stock market as a direct result of the election.
Depending on who gets elected and the make up of the next Congress, the stock market is almost certain to (drum roll, please) …… rally strongly, suffer a major correction, or stay relatively flat.
It’s hard to say exactly which, but I am pretty sure it will be one of those three.
Seriously. OK. I am being a bit of a smart aleck. And I mean no disrespect to those who are legitimately concerned about the outcome of this election. I think there is a lot to be worried about with the next President. I just don’t think a short-term swing in the stock market is one of them.
To explain my position a little further… If the market loves the President-elect it may rally, perhaps significantly. On the other hand if the market really dislikes the President-elect it may sell off, maybe by a lot. But in either case, I think the post-election market rally or sell-off will be temporary, and stock values will return to “normal”.
It’s also quite possible that the market may shrug off the election and continue to do what it does based on economic fundamentals, action (or in action) on the part of the Federal Reserve, and in response to other headline events around the world. In other words…business as usual.
I do not expect the election to be the beginning – or the end – of anything.
History is on our side. Stocks have posted positive returns under both Democratic Presidents as well as Republican Presidents. Unless the country is in a recession or experiences other outlier-types of events, performance of the stock market tends to be about average during election years regardless of which party wins, 2008 being the obvious and most recent exception. In 2000, markets faltered as well but if you recall, a few hanging chads kept us from knowing exactly who the president was until several weeks after the election.
Why we plan and diversify and focus on the long-term. Markets can go up or down for any number of reasons, most of which are quite unpredictable. At this point, it is nearly impossible to predict who will win the Presidential election or what the make up of the next Congress will be, much less the market’s reaction to such events.
This is why we plan ahead, diversify our assets and focus on the long-term rather than responding to headline news or trying to guess the outcome and fallout of the next big event.
If you have adequate short-term cash reserves, own a properly diversified portfolio that suits your risk tolerance and time horizon, and focus on the long-term, you are well positioned to get through the next couple weeks.
Now it’s time to sit back and enjoy the spectacle known as American Presidential politics.