The election on Tuesday is one of the most momentous in the nation's history — and investors are understandably nervous about what might be the market implications.
The quip that history doesn't exactly repeat itself, but it often rhymes, is worth remembering when it comes to looking for guidance. Financial market history strongly suggests the market impact of the election itself will be surprisingly minor, at least in the short run.
To be sure, market volatility will likely skyrocket if the election is contested. There are legitimate investor worries that stock market valuations — largely driven higher by the enthusiasm for tech stocks — are way too frothy for comfort.
Sticking with your investment and financial plan isn't necessarily easy considering the stark policy and personality differences between the candidates for the White House, the pandemic recession and rising cases of COVID-19. But the rhyme of market and electoral history advises that it's the sensible course.
Take a recent report by Mitch Tuchman, chief investment officer of the investment firm Rebalance. He looked at the effect of presidential elections on stock market returns from 1960 to 2017. Specifically, he examined returns during an election year and the following year.
The average stock market return during election years was 11.3%, and it was 9.9% the year subsequent to the election. Stocks tend to climb higher no matter who gets into the White House, although there are notable exceptions, mostly during economic downturns.
Does political party matter? Tuchman looked at different ruling political parties from 1860 to 2010. The results were an average annual return of 8.2% per year for Republican presidents and 8.4% per year for Democratic presidents, based on a 60% equity, 40% fixed-income portfolio. In other words, there's no real material difference.
"The long-term average returns of a diversified portfolio of stocks and bonds is virtually the same during Republican and Democratic administrations and historically not significant for stock market performance," writes Tuchman. "Any exceptions related to the party of a president are likely more related to economic conditions than politics."
Betting on the outcome of the election could be hazardous to your wealth. Focusing on building up savings and getting rid of debts is good for your wealth in all seasons, including an election year.
Chris Farrell is senior economics contributor, "Marketplace," and Minnesota Public Radio.
