The presidential election is over and investors may be wondering how their portfolios could be affected by the result. The answer is that presidential elections typically don’t have a long-term effect on market performance. Elections can have a short-term effect, and stock market volatility tends to spike prior to Election Day. This is because markets don’t like uncertainty and presidential elections by definition add another layer of uncertainty. As you can see here, stock market volatility, as measured by the VIX, tends to be high 100 days before a presidential election. But what’s important to keep in mind is that volatility typically stops increasing shortly after Election Day. And then the volatility stabilizes 100 and 200 days after the election, once the markets have had a chance to digest the news. Based on Vanguard research going back to 1853, stock market performance is virtually identical no matter which party controls the White House. Once volatility is taken into account, stock market returns are indistinguishable under Democratic and Republican administrations. One of the more interesting findings in our research is that presidential elections also have very little impact on bond markets. This is somewhat surprising to many because the conventional wisdom is that the Federal Reserve, the primary driver of bond market performance, is less active during a presidential election year. If this were the case, it would suggest presidential elections can have an impact on bond market performance. However, our research, as summarized in this chart, suggests that the Fed has been active in several recent presidential election years, having raised and lowered rates. Its behavior doesn’t deviate much from that of other years. Rather than react to the results of the election, investors should remain focused on the following enduring principles—which involve things they can control:
- First, set clear investment goals.
- Second, ensure portfolios are well diversified across asset classes and regions.
- Third, keep investment costs as low as possible.
- Finally, take a long-term view.
In the end, short-term developments, like the 2016 presidential election, are less important to investors’ success than the big-picture trends that will shape markets in the years ahead.
All investing is subject to risk, including the possible loss of the money you invest.
Past performance is no guarantee of future results.
Diversification does not ensure a profit or protect against a loss.