US presidential elections can be the subject of much excitement or despair depending on who you’re rooting for.
Stock market returns in the middle of an election cycle tend to be slow compared to the year right before and after a presidential election year. And this shouldn’t be surprising as we are organic vessels often guided by nothing but our emotions and gut instinct; typically, around election year, these emotions are tied to the outcome, which subside once the elections are over.
However, this kind of “emotional investment” approach isn’t necessarily the safest, and irrespective of which candidate wins the presidency, a few basic sensibilities can help you mold your investments around the election cycle, in order to continue reaping good returns.
Understanding the Economy
The first thing we need to do is understand what the US economy is going through at the moment. Growth was initially slow following the 2008 financial crisis, but markets bounced back fairly strong. Things have ‘recalibrated’ so to speak and the markets are hungry for growth.
That being said, eight years following the 2008 crisis, the economy isn’t quite where it should be, but all hope isn’t lost either. Let’s quickly weigh in a few pros and cons before discussing investments.
We have it good because:
- Oil prices might have soared back to $50 per barrel compared to $27 in February 2016, but are still low in contrast to 2008 prices ($140 per barrel).
- Interest rates are currently low; people were worried when the Federal Reserve had jacked up interest rates in December 2015; however, the yield curve still remains reasonably steep. People are applying for homeowner loans and other such loans again, giving a boost to the economy.
- Markets are fairly valued, keeping within long-term averages, especially seeing how the current growth rate is.
- Throughout 2016, inflation has remained at around 1% which is indeed low.
We may not have it so good because:
- Growth isn’t as high as expected; retail sales have yielded disappointing figures and significantly fewer jobs have been reported than anticipated.
- The Federal Reserve increasing its rates in December last year came with a price; in January 2016, markets were off to a bad start. In fact, the first two weeks were the worst ever in S&P 500 Index history, with a -4.96% return to show for it at the time.
- The elections this year have narrowed it down to two of the most disliked presidential candidates in US history; election years generally post lower investment returns as opposed to the years right before and after an election cycle. This year is special, however, in the sense that both candidates are widely unpopular, which means there’s going to be a certain level of emotional instability revolving around stock market investments.
Now, Let’s Talk Investments
After understanding these pros and cons, we can better plan our investments. You see, the markets are not necessarily unpredictable only around an election year, but generally around non-election years as well because we live in an uncertain world.
For discussion’s sake, let’s assume that Clinton wins. You can pretty much expect the same market conditions that were prevalent under Obama’s presidency: a slow policy-making cycle where things fail to materialize fully. And this doesn’t have to be a bad thing. If Congress remains under GOP control, it’s quite likely that Mrs. Clinton might come to a compromise with a Republican Congress and play a budget balancing act, much like “good ol’ Billy” did back in the 90s.
In case it hasn’t dawned on you already, a presidency under Donald Trump can come with a baggage full of uncertainties. For instance, he wants tariffs imposed on foreign goods. However, beyond all that rhetoric, we can pretty much expect the same slow policy-making grind we witnessed under Obama’s presidency. Still, Trump being a seasoned dealmaker, might introduce a few nonpartisan, in-demand solutions. You might see the same scenarios more or less, which are going to become clearer as we go.
The Final Lowdown
As long as you invest with a balanced and long-term, consistent approach, neither candidate should dramatically affect the outcome of your investments. Your faith in the system will certainly be tested, though you don’t have to let those events drive your investments.
Maintain a broad and long-term focus, as a narrow-sighted one won’t reap you the best returns. It’s that simply, really.