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How Will This Year’s Election Affect The Economy?

How Will This Year’s Election Affect The Economy?

October 22, 2016
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This presidential election has been one of the most interesting and it’s all about to end on November 8. As get closer to the big day, many investors worry how the results will impact the markets.

While past performance may not always be indicative of future results, we can learn some things from historical trends. The market cycles and presidential terms are closely intertwined. In the 60 years from April 1942 to October 2002, we saw 15 stock market cycles that each lasted around four years, which is not coincidentally the same length as presidential terms.

Furthermore, bear markets frequently happen during the first half of presidential terms and the bull market follows in the third and fourth years (with the fourth year serving as an election year). In fact, a bear market defined as a decline in the S&P 500 Index of 15% or more over a period of 1 to 3 years never occurred during an election year from 1942-2002.

What Causes the Cycles?

Why are political and economic cycles directly related? Fiscal policy is the main reason. The Federal Reserve has the power to impact the economy by setting interest rates and controlling the money supply. And the government’s executive branch can influence the economy through spending and taxation policies.

Politicians know how connected the economy’s health and voter satisfaction are. As we approach an election, the sitting president hopes to boost the economy to keep his party in office through the next election. This use of fiscal policy to boost the economy leading up to an election contributes to election year bull markets.

Once the election is over, the hype simmers down and reality sets in. The newly elected president must get down to business and set aside political appearances. Just like starting a new job, it can take time to build momentum, which is why the first two years of a presidential term are typically slow times in the markets. Once fiscal policy picks up pace and the presidential term wanes, the markets carry into the next election and the four-year cycle begins again.

What You Can Expect This Election

This is anything but a normal election, and with two candidates whose opposing parties find polarizing, some people are going to extreme lengths to predict the end of the economy. But beyond poll numbers and newspaper headlines, will the outcome make as big of an impact as people believe?

If we look back on historical data dating back to 1900, the election won’t drastically impact your portfolio, regardless of who is elected.1 But, the fact that it is a big election (because the sitting president is in his second term) does have an effect, and the markets typically don’t perform as well as in other elections.2

According to history, we can expect moderately positive market returns this election year, but they’ll slow down once the new president takes office. Since this election has been particularly unpredictable, investors may want to prepare for short-term volatility.

Your Next Steps

I believe that stock market investing requires a long-term approach. The stock market is volatile, whether or not it’s an election year. It can be hard, but try to ignore the media’s predictions of doom and gloom. If your investment strategy is built for the long-term, the elections shouldn’t significantly impact your portfolio.

Emotions and media noise can make us nervous about our investments. If you’re worried about your strategy, it’s a good time to get a second opinion from a professional. An advisor can talk you through things and calm your fears. This can keep you from making irrational investment decisions. I’d be happy to schedule a review with you. To schedule a second opinion review, contact me by calling 612-746-2261 or emailing jon_marker@glic.com.

About Jon Marker, CLU®

Jon Marker is a financial representative with Foster Klima & Company and independent financial advisor. He combines his 24 years of experience in the financial services industry with his passion for helping to create individually tailored financial solutions for business owners, professionals, and their families. Through insurance, succession planning, legacy planning, and other financial services, Jon strives to provide specialized guidance for a lifetime of financial security. As a Chartered Life Underwriter® (CLU®), he has an in-depth knowledge of the insurance and risk management needs of individuals, business owners, and professionals. A lifelong Minneapolis, Minnesota resident, he specializes in serving successful and family-oriented business owners and professionals throughout the Twin Cities. To learn more, visit www.jonmarker.com, call 612-746-2261, or connect with Jon on LinkedIn.

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1 http://www.kiplinger.com/article/investing/T043-C008-S003-how-presidential-elections-affect-the-stock-market.html#ECpfayA6M0iQEehv.99 

2 http://www.marketwatch.com/story/2016-predictions-what-presidential-election-years-mean-for-stocks-2015-12-29