Should long term investors be concerned with markets during Presidential Election Cycles?
Presidential election cycles can be stressful even for the most seasoned investors, as uncertainty about the election results and subsequent policy changes often drives market volatility.
First, it’s important to note that market data typically goes back to the 1920s, and only 24 presidential elections have taken place during this period. This leaves a relatively small sample size, making it difficult to draw statistically significant conclusions. Additionally, presidential elections represent only one variable and do not account for many other factors that affect market returns. Major economic events, such as the Global Financial Crisis in 2008 or the COVID-19 pandemic in 2020, have coincided with election time frames, complicating the analysis further.
While market volatility may increase in the months leading up to an election due to political uncertainty, markets typically do not favor one political party over the other. Markets have shown both upward and downward trends under both Democratic and Republican presidencies. Moreover, no consistent market trend has been observed based on which party holds a majority in Congress. In fact, some evidence suggests that a divided government can lead to higher returns due to political gridlock, which reduces uncertainty.
The bottom line is that high-quality, cash-generating companies will, in our view, continue to operate regardless of the political landscape. It is essential for investors to remain focused on participating in the returns generated by these companies as shareholders.
While everyone has personal political beliefs, long-term investors should recognize any biases these beliefs may create. It is important to take a rational approach during election cycles by sticking to a predetermined asset allocation, rebalancing as needed during periods of volatility, and avoiding rash decisions based on sensational headlines.
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