Drama, surprises, and dark-horse candidates gaining traction seem to be the norm of presidential election cycles lately. How does the election season affect financial markets? If there is one thing that markets despise, it is uncertainty, and this election cycle is poised to be filled with it. What does that mean for investors? Certainly no one can predict the future, but if I had to make a guess based on the current crop of presidential candidates and their very broad range of economic and tax policy prescriptions, I would say we should expect a few more ups and downs than usual in the nine months before the election.
Long Lead Time for Change
This campaign season will be filled with promises of changes that will spur economic prosperity. However, it is important to remember there is a long road between campaign rhetoric and completed legislation. It could take years for major policy reforms to get through Congress, and then still more years before the effects are felt in the economy. By then, a different president may have been elected and is getting the credit (or disdain) for bringing about the economic boom (or bust) his predecessor created.
Geopolitical Factors Often Dominate Market Moves
Neither party shows a definitive edge over the other as being more beneficial for financial markets. In fact, both have excellent records. And, let us not forget, it is often unpredictable geopolitical events that really get markets moving. For example, while President Roosevelt’s New Deal certainly helped ease some of the strain of the Great Depression, the economic demands of World War II were really what spurred American prosperity in the subsequent decades.
Best Long-Term Strategy: Stay the Course
So, what should an individual investor do when a leading candidate is proposing sweeping economic reforms and the markets are gyrating in response? Usually, the best thing is simply to stay the course. If you are having a hard time sleeping at night, it could be a sign you may need adjust the level of risk in your portfolio. Here at Orion, we focus on what we can control in portfolios: asset quality, diversification, cost and tax efficiency. Bouncing in and out of investments on “what ifs” is usually a great way to lose money.
For decades, global capital markets have been an excellent place for investors to capture attractive returns. The cost of these returns shows up in the form of volatility, but investors who are able to ignore short-term noise in the markets and stick to a prudent, appropriate investment plan are in a great position to succeed.