How Elections Impact Investors

It’s common knowledge that elections impact investors and the markets, but how significant is that impact? And does it vary from election to election?

Elections certainly impact investors, but it’s not as simple as that. Here is what history has taught us about election years:

No Definite Pattern

Looking at elections over the years, there is a wide range of market behavior. Here is a graph from the Dimensional video, “What History Tells Us About Elections and the Market,” that illustrates that well:

As you can see, the market returns are all over the place. And there is so much more at play than just the election of a new president.

There are world events, the unemployment rate, interest rates, oil prices and other elements that are part of the whole picture of the market, and the election is just one piece of the puzzle.

Another important note: as you can see from the graph below, regardless of what’s going on during an election year, investments continue to grow in the long term. This is why passive investing works. It smooths out those short-term losses as markets rebound.

How Have 2020 Elections Impacted Investors?

Currently, the U.S. markets are doing well. There was a lot of speculation before the election about how the election would impact markets, and so far they are holding steady.

It’s tough to isolate whether that has to do with Joe Biden becoming president elect, however. We are still in a pandemic, which has had enormous effects on the economy.

One important piece of news this month was that multiple coronavirus vaccines have been shown to be effective and may be available soon to the first round of the public. That seems to have bolstered the blue-chip Dow, which has had its strongest month since January of 1987.

This is just another example of why it’s rarely just the election affecting investors’ behavior and the markets. 

How Should Investors Proceed?

Between now and inauguration day, we could still see some market reactions to the election. 

As an investor, what, if anything, should you do?

If you will be retiring within the next five years, it’s a good idea to go back into the markets slowly and more cautiously. In addition to the election, we are still in a pandemic, and we may see that worsen over the winter. That sets the stage for some volatility, which could hurt your retirement savings.

If you have more time before retirement, you have space to hold steady and ride out any challenging economic times that might come up. As always, a more long-term, passive approach tends to pay off in time.