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What Happens To The Markets During Elections?

We’re all familiar with the old saying, “markets hate uncertainty.”

And there are few things more uncertain than the outcome of this November’s election. At this point, it’s a toss-up who will become our 45th president, but whether Hillary Clinton or Donald Trump takes the oath of office January 20, it could have a huge impact on our economy – and on your portfolio.

Despite predictions of doom and gloom from both sides of the aisle, no one knows for sure how things will play out. Elections, especially presidential ones, are highly-charged events that cause emotions to run high, and when our emotions are over-charged we tend to make decisions with our hearts, and not our heads.

Market returns during election cycles tend to be lower than in the years right before and right after we cast our ballots. We generally return to normal after the votes have been counted and emotions have been calmed. This is good news, because emotional investing isn’t always the smartest investing. You really should strive for a broad, long-term approach, which tends to produce better results.

The past could help us predict the future. For example, watch the S&P 500. Since 1945, it’s gained 5.9%, on average, during presidential election years. During election years in which neither candidate was an incumbent, the index went down by an average of 3.3%. Traditionally, in the first year of each presidency the stock market goes down (with the exception of the first terms of Franklin Roosevelt and Bill Clinton.) That being said, we can look at what some analysts are saying could happen to the markets under a Trump or Clinton presidency.

With Donald Trump in charge, his reputation for making of-the-cuff remarks and shooting from the hip might initially spook the markets, because equity investors traditionally hate uncertainty. In a climate where Wall Street parses every statement uttered by the chairman of the Federal Reserve, this could prove to be unsettling, to say the least. Look for Treasury bonds and the dollar to rally, though, as foreign investors roll in.

A Clinton win will most probably lead to more of the same, as she would likely continue the economic policies of President Obama. Some analysts predict Clinton would assume a less hostile stance toward our trading partners, especially Mexico and China, avoiding a possible trade war. Wild cards under a Clinton presidency include how she would influence tax policy and whether she would “crack down” on Wall Street. Look for a continuation of the stock flatness that began with the end of the Fed’s Quantitative Easing that began in late 2014.

If you are concerned about how the markets will look after November, you should follow the example of the Federal Reserve. Each year it conducts stress tests on some the nation’s largest financial institutions, to assess their financial health and determine if they have enough capital on hand to weather an economic downturn. Now is an opportune time to assess your investments and make sure you’re prepared for what might happen.

There are a few things to evaluate in your stress test, including:

  • Do you have enough money saved if the unexpected happens?
  • Are you ready for unplanned health care costs?
  • Can you maintain a comfortable standard of living in retirement?
  • Can you cover discretionary expenses?
  • Can you develop additional sources of income if needed?

Before the election gets any closer, you should consult with your financial advisor to do a stress test on your finances. For an honest evaluation of your portfolio and seasoned advice on ways to protect it, we hope you consider contacting CGO Wealth Management.