Should Investors Be Concerned About The Presidential Election

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Investing during election years is full of uncertainties. With the possibilities of policy changes, economic reforms, and shifts in government priorities, investors are often hesitant to make significant financial decisions, creating market volatility in the preceding months of elections.

Thus, how can we figure out the intricate dynamics between presidential elections and the stock market? What is the wisest way to navigate through the uncertainties?

History is there to be studied. Looking at past patterns and behaviours can provide valuable insights into how the stock market has reacted to previous elections and political changes.

The Election Cycle Theory

The election cycle theory was developed by Yale Hirsch, author of the Stock Trader’s Almanac. If there is no force majeure, this theory suggests that stocks are performing weaker during the first and second year post-election years and stronger during the third and fourth years, regardless of which party won the election.

An increase in the stock market during the third and fourth years of a presidential term is particularly evident when the incumbent is running for re-election. The incumbent would typically prioritise economic growth to secure a second term in office, resulting in market growth.

Although stocks tend to perform well in the fourth year of a presidential term, which is considered an election year, investors often postpone making investment decisions months before the election. This results in inevitable market volatility due to uncertainty around the election outcome.

The possibilities for policy changes, economic reforms, and shifts in government priorities are yet to be known. Hence why many are unsure which investments can bring them capital gains.

Election Year and Stock Market History

Market volatility during an election year is inevitable. It’s historically proven that stock markets have experienced unpredictable fluctuations in the months leading up to election day. Prices can drop abruptly or move sideways before soaring back up following the elections.

Before Election

2020

Source: Yahoo Finance

The graphic shown above shows the DJIA’s average stock price plunge which continued a month before election day (i.e., November 3, 2020) and reached its lowest dip on October 30, 2020.

2016

Source: Yahoo Finance

A month before election day in 2016, the average price of DJIA stocks showed sideway movements. The graphic, however, shows a slight downtrend a few days before an election day (i.e., November 8 2016).

After Elections

The volatility during the election year is likely to be temporary. After election days investors will shift their focus to long-term portfolios, letting the short-term effects from the election go unbothered.

This is proven by the stock market rallies that arose right after election day. The data from 2020 shows that DJIA’s annual gain has surged to 7.2%. The same thing applies to the S&P 500 and Nasdaq as well, which gained 16.3% and 43.6% respectively.

Navigating The Market Fluctuations

Despite lessons from the previous elections, nobody can definitively predict what will happen in the future. This is why as an investor, you need to employ risk-averse planning to secure your investments and capitalise on opportunities.

The strategies include:

  • Portfolio diversification: Ever heard “don’t put all your eggs in a single basket”? This also applies to stock investment. By diversifying your portfolio, you will minimise risk due to short-term volatility during election years
  • Focus on investing in companies with solid fundamentals: Companies with solid fundamentals have stable financial health and strong performance indicators. That’s why you must do your research on the specific company’s industry before deciding to invest in their stocks.
  • Stay informed: During the election year, political developments, policy changes, and market sentiment can have an impact on the stocks and your profitability. By staying informed, you can adapt your investment strategy accordingly.
  • Seek professional advice when needed: Doing your own research on which stocks to invest in during the election year can be confusing. But with a financial advisor, you have a guide in navigating market uncertainties and making informed investment decisions.

Key Takeaways

The performance of the stock market can be closely influenced by the events from the presidential elections. Stock markets have historically shown volatility – either a plunge or sideways movement throughout the election cycle.

Despite the uncertainties during the election year, this doesn’t mean investment should be avoided. You can earn capital gains from the stock market by starting off with thorough market research.

In any case, if you need a helping hand, UOB Kay Hian provides the tools and resources you need to navigate the investment landscape confidently. This way, you can still make a significant capital gain despite the uncertainties happening in the election year.

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