The stock market is in essence a cyclical marketplace. Share prices go up and down as investors decide whether to buy or sell. Some years moods are bullish, others bearish. The entire U.S. economy goes through cycles, between recessions and economic booms. Of course, what goes on in the world around us in any given year also directly contributes to these market fluctuations. 2020 is certainly no exception. With an upcoming presidential election and economic and societal turmoil, it’s no wonder the stock market has gone from boom to bust to boom once again.
Here’s a look at how presidential politics, election cycles, and the electoral mindset impact investments:
What the history books show.
Historically, the stock market’s reaction to an upcoming presidential election hinged on a wide variety of factors. The candidates, their platforms, and their short and long term economic and societal visions for the country played key roles. There is a well-documented four year pattern historically linked to our elections known as the “Presidential Cycle”. Basically, the first two years a president is in office, market returns trend lower while the second two years, as the next election looms, have the opposite effect. Now again, there are obviously deviations from this pattern depending on what’s going on in the world at the time.
Remarkably, how the stock market performs in the months prior to Election Day typically correlates with which candidate wins. Gains often lead to an incumbent victory, while losses dictate a change in governmental leadership. So, does the political climate push the market around? Or do the market’s movements cause the electorate to act?
Uncertainty breeds volatility.
Stock market tremors often correlate with news on earnings, Fed policy changes, political developments, and fluctuations in human emotions. Investors thrive on assurances. The market is a forecasting mechanism, which means investors buy and sell based on what they think will happen in the future. If the future looks murky, the market responds accordingly. Let’s just say the markets and uncertain times don’t play well in the sandbox together.
The huge political divide in the U.S. is making it very difficult to foresee what the country will be like in the future, casting doubt on many aspects of everyday American life. How can investors make educated decisions about what the future holds while the present is so unsettled? What we are left with is a marketplace that is very unsure of itself.
Today’s political climate.
As the 2020 election approaches, the market is likely to be remain quite volatile. To say we are living in a highly charged political environment is a bit of an understatement. What will happen in November is anyone’s guess. The two political parties could not be more at odds, leaving the electorate in a massive tug-of-war for dominance. Even the validity of the upcoming election is being questioned, well before Americans have had the opportunity to cast their ballots. Realize too that elections do not take place in a vacuum. Meaning the turbulence in the stock market isn’t solely because the next president is being vetted. The pandemic, social unrest, economic fallout, federal policies and initiatives, and international affairs are all doing their part in causing wild gyrations.
Buckle up investors.
As the next couple months play out, smart minds in the investment world are placing their bets. Opinions about each presidential candidate, how he will run the country, what changes will be implemented, and what it all means for businesses and consumers alike are being weighed daily. Prepare for bumpy roads ahead in your portfolio. Take the time to review your investments, decide whether you are on solid footing, and take steps to ensure you are comfortable with where you stand. If we can be of any help, do not hesitate to give us a call.