How Presidential Elections Affect the Markets

It’s an election year in the United States, and the 2016 presidential race has already offered up a number of surprises.

But the important question is, what might it mean for the markets, and as a result, your investment portfolio?

Looking to history, there appears to be evidence that the markets respond better to election processes whose outcomes are predictable, and, of course, that’s not the case in 2016.

First, the current president isn’t running for reelection, and departing presidents can create a void that financial markets find worrisome.

Having crunched the numbers, Merrill Lynch Global Research found that the S&P 500 Index declines by an average of 2.8% in presidential election years in which a sitting president is not seeking reelection.

Compare that to years in which the sitting president is seeking reelection: according to Merrill Lynch, the S&P 500 Index averages returns of 12.6% in those years, compared to the average annual return in nonelection years of 7.5%.

Second, in 2016, additional uncertainty in the form of intense geopolitical worries and a historically wide primary race must be factored in.

The inevitable conclusion: markets could be in for a bumpy ride all the way through to the November 2016 election. But there’s light at the end of the tunnel in the form of a so-called relief rally. According to Merrill Lynch, the first year of a new presidential term sees the markets rise by an average of 6%.

It’s also important to remember that statistics based on previous elections can’t predict with certainty what will happen in 2016, so for investors, the best way to prepare for possible market volatility in 2016 is to take a long-term perspective: work with your advisor to develop a portfolio that is focused on your individual financial goal(s).

While there may be market ups and downs this year, staying the course is almost always your best option.