As summer winds down, November’s midterm elections are fast approaching. A total of 435 seats in the U.S. House of Representatives and 35 out of 100 seats in the U.S. Senate will be up for grabs, not to mention numerous state and local elections that will determine who controls the chambers of Congress in states across the country. Chances are that before, during, and after the election, media personalities and “experts” will have ideas about what certain results mean for the markets, which hot sectors or companies to watch, or what a split or united government means for the U.S. market. I encourage you to drown out the noise and focus instead on what nearly 100 years of past data tells us to expect.
You Are Most Important
Despite what many media outlets may suggest, there is no universal right answer when it comes to your personal portfolio. Instead, the right approach considers your individual goals and objectives, your assets, and your desired financial future. Financial salespeople, the news, or even your brother-in-law shouldn’t be the ones to make decisions about how you manage your life savings.
Volatility
Market volatility can occur before, during, and after elections as investors react to new information. Election-related developments are only one of many factors affecting markets, and historical data does not show a consistent election-month return pattern. Portfolio changes should be evaluated in light of an investor’s goals, time horizon, liquidity needs, and risk tolerance rather than a prediction about a particular election result.
Expectations Matter
Election outcomes and market reactions do not always move in lockstep. In the months leading up to the 2016 presidential election, many commentators predicted that a Trump victory would result in a sharp market decline.[1] Instead, on November 9, 2016, the day after the election, the S&P 500 closed more than 1% higher. This illustrates the challenge of trying to time the market. Even an investor who correctly anticipated the election result, despite polling suggesting otherwise, would also have needed to accurately predict how markets would respond to that outcome. Successfully timing the market requires not only forecasting future events but also anticipating how millions of investors will react to them, a task that is extraordinarily difficult to do consistently.
[1] Examples include: “What do financial markets think of the 2016 election?” Brookings Institution, 10/21/16, “What Happens to the Markets if Donald Trump Wins?” New York Times, 10/31/16.
Markets Matter
What really matters for investors is how their wealth grows over long periods of time. The chart below, from Dimensional Fund Advisors, illustrates the hypothetical historical growth of $1 invested in the S&P 500 Index from January 1926 through June 2022 across periods of different party control. It does not establish that political leadership has no effect on markets or that an investor will achieve a particular result.
Source: Dimensional Fund Advisors, using S&P 500 Index data from S&P Dow Jones Indices LLC, January 1926–June 2022. The returns include reinvested dividends. The figures are nominal. The illustration does not reflect advisory fees, other expenses, taxes, or inflation. The S&P 500 is an unmanaged index and cannot be invested in directly. This is historical index performance, not Greenspring performance. Past performance does not guarantee future results.
Final Thoughts
Political leadership changes over time, and market reactions to election outcomes are difficult to predict. Historical data illustrates that markets have experienced both gains and losses under different combinations of party control. Investors should base portfolio decisions on their goals, time horizon, liquidity needs, and risk tolerance rather than on a prediction about a particular election outcome.
