History has shown that elections have a minimal effect on the stock market in the long run, despite a number of persistent myths that say otherwise, according to JPMorgan.
While there is much less intrigue about who candidates will be than there has been in year’s past—President Joe Biden and former President Donald J. Trump have virtually sewed up their respective parties’ nominations—advisors should still be aware of their clients’ election year jitters and the possible implications they can have on investing behavior, according to a new white paper from J.P Morgan Private Wealth.
While a common myth is that stocks don’t do well in election years, the reality is that stock returns have sometimes underperformed non-election years, but very slightly, J.P. Morgan said, citing Bloomberg Financee data.
“We looked at the S&P 500 in election versus non-election years since 1928 (as far back as we have data): Stocks returned a solid 7.5%, on average, in presidential election years, and an only slightly stronger 8.0% in non-election years,” the firm noted.
While volatility can be a factor in any year, election years do tend to be more volatile, especially just before votes are counted, J.P. Morgan said.
“The uncertainty tends to make it more pronounced. Some investors take some risk off the table in close elections, and then put it back to work once there is more clarity on policy. After polling results are announced and the uncertainty dissipates, stocks have tended to rally. Looking at 40 years of Election Days, stocks have been higher, on average, one year later,” the firm said.
Another persistent myth that can derail investors or cause them to kneejerk out of investments is the belief that the markets will rally or tumble based on which presidential candidate is elected, the firm said.
While some election years experience bigger performance swings and more volatility than others, the reality is that the economic backdrop and macroeconomics at election time tend to sway the market more than who wins, the firm said.
“For instance, in 2020, COVID lockdowns and reopenings impacted broad markets much more than the opposing candidates’ ideologies. Or consider 2008, when Democrat Barack Obama ran against Republican John McCain: The unfolding global financial crisis was the predominant driver, not either candidate’s view on the Iraq War or healthcare. When the market has fallen post-election, it was almost always because a recession was imminent or because (as in 2008) the economy was already in recession,” J.P. Morgan said.
Another pervasive myth that even some advisors may believe is true is that the Federal Reserve will not change policy in election years.
The reality is the Fed has not shied away from hiking or cutting rates during election years, the firm said.
“The Fed is focused today on softly landing the economy without stalling growth, and it’s no small task. The pivot toward rate cuts requires careful navigation to ensure inflation continues to moderate and that growth doesn’t tip into recession,” J.P. Morgan said.
It is true that the Fed “has shown some hesitancy about moving interest rates the two months before a November presidential vote, but for the rest of an election year, policymakers have historically done what they wanted to. Since 1956, the Fed has raised or lowered interest rates in every election year save one (2012),” J.P. Morgan added.
That doesn’t mean that different policies in Democrat or Republican administration won’t sway the economy and impact markets with tax policy changes, tariffs and a new administration’s impact on sector performance, but it’s critical for advisors to remind investors of their long-term goals, the firm said.
“While politics can evoke strong emotions, we urge you to not lose sight of your long-term investment goals. Of course, there are risks from ongoing friction points, including inflation and geopolitics. But our view is that as long as growth holds up, price pressures abate and the Fed embarks on a rate-easing path, there will be investment opportunities regardless of the election,” J.P. Morgan said.