Politics are a major factor in financial markets. With the upcoming election, news in politics is constantly impacting the market. The market has been all over the place in the past week. Although the influence of politics on the market is difficult to predict, there are several trends that have been noticeable.
Presidential candidates are often gauged as “pro” or “anti” business, and the stock market reacts accordingly. When candidates generally are seen as pro-business are leading in the polls, the market tends to go up. When candidates that aren’t seen as pro-business are in the lead, the market tends to head in the opposite direction.
Historically, it has been found that following an election year the bond market will outperform while the stock market will slightly underperform. It has also been discovered that although the party affiliation matters slightly, it does not have a huge impact on trends. The bigger question of how the market reacts is whether the incumbent party wins the presidency or not.
If the incumbent party retains the presidency, the stock market averages around six-and-a-half percent a year, while if there is a change in the party it has returned slightly lower at five percent.
Going one step further, certain sectors and companies can be impacted to a greater extent depending on the platform of the politicians. For example, a “hawkish” politician would be good for the defensive industry versus a “dovish” politician. That being said, the effect on the stock market is a wildcard. At this point in the election process, investors will see politics playing a heavy role in the market, which will likely increase the volatility of stocks.
It is important to note that this is only historical data, and the outcome of the election could hold vastly different results for the market. “Time in the market defeats timing the market.” It is better to just be in the market longterm, rather than try to predict how the market will react to an event like an election.
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