Politics evoke strong emotions, and election seasons can be a difficult time for people to maintain a long-term perspective.
On the night of October 17, 2020, I like five million other Kiwis, watched the general election results roll in. Based on pre-election polls there was little doubt that Labour would form the government again.
Post-election, the New Zealand markets were unrattled by the result and looked pretty steady with investors relaxed after the Labour Party secured a historic majority in the general election. However, the electricity sector showed a modest decline in the share market.
It took a while for television to make its mark on New Zealand elections, but since the 1980s the small screen has been the decisive campaign battleground and post-election reporting.
Since 1987/88, I have always been glued to the TV on election nights, both in New Zealand and the US.
2016 was the 8th US presidential election I watched from the time the first poll closed until one candidate had the necessary 270 electoral votes. It was the first one I remember being truly surprised by the result. Depending on what poll you looked at, Donald Trump was given a 15-30% chance of winning on election night. However, as time wore on, Trump's chances of winning started to increase.
At 9:00 pm in Washington DC, it still looked like Hillary Clinton would win. One hour later, Trump had become the favourite to win. Another hour later, it was clear Donald Trump was going to become the forty-fifth President of the United States. I immediately received a few texts from industry peers and friends, saying "The market is going to tank."
While I would not call it a crash, the share market prospects were certainly reacting negatively to Trump's victory. The futures sank rapidly. The S&P 500 fell more than 5% in premarket trading, triggering a circuit breaker to halt trading. The next morning, markets had already started to rebound, and the S&P 500 Index was up over 1% on the day after the election result.
It is worth noting that a quick Google search for 2016 Trump win returns numerous results predicting an instant recession, markets tanking, stocks sinking (all published before the election result of course).
But the US equity market has done very well since the 2016 election, despite the market's initial reaction. Between 2017 – 2019, the average annual return for the S&P index was over 14%, and in total, the market is up 46% since Trump became President.
This type of market reaction wasn't recorded just when Trump was elected. When Obama was elected in 2008, he came to a market decimated by the 2008 financial crash. As he was sworn in, the Dow Jones Industrial Average fell by 3.9% – its largest inauguration day plunge since 1896, according to Investopedia. After bottoming out in March 2009, the US market entered one of the longest bull runs in its history and in Obama's eight years as President, the S&P 500 went up 182%.
How did investors react in recent election years?
Politics evoke strong emotions, and election seasons can be a difficult time for people to maintain a long-term perspective.
Given what has already happened globally in 2020 – a deadly pandemic, a global economic recession, widespread public unrest and extreme market volatility – moving to the sidelines would be an understandable reaction for investors who prefer to wait and see what happens.
However, history has shown that it is usually a mistake. A far better strategy has been to stay the course with a long-term investment plan right through the election.
Data published by investment research company Morningstar shows that during election years, investors put more money into short-term bonds and deposits than they do into equity markets. Election Year is the only year of the three or four-year election cycle that this occurs. The year following the election, investors pile money back into the stock market once they know the result.
History shows us that the Prime Ministers and Presidents have far less impact than you may think on the share market. Many other factors influence stock prices: interest rates, energy prices, technological innovations, geopolitical conditions, demographics, global pandemic, consumer sentiment, global demand, trade flows, employment trends, regulatory environment, investor sentiment, valuations to name but a few.
Despite what the politicians tell us in debates, campaign commercials, social media, and media interviews, the economy does not change immediately when a new leader is elected.
So does anyone know how the market will react immediately after the election results?
No, no one does. That's the reason I encourage investors to stay in the market and maintain their long-term investment goals. Getting too hung up on what-ifs over the next three years means losing sight of the big picture. Instead, consider focusing your energy on aspects of your financial well-being that you can control, like how diversified you are against volatility in the markets. Seeking financial advice from a qualified adviser will help you keep things in perspective, stay calm and invested.
Nick Stewart is an Authorised Financial Advisers and CEO at Stewart Group, a Hawke's Bay-based CEFEX certified financial planning and advisory firm. Stewart Group provides personal fiduciary services, Wealth Management, Risk Insurance & KiwiSaver solutions.
The information provided, or any opinions expressed in this article, are of a general nature only and should not be construed or relied on as a recommendation to invest in a financial product or class of financial products. You should seek financial advice specific to your circumstances from an Authorised Financial Adviser before making any financial decisions. A disclosure statement can be obtained free of charge by calling 0800 878 961 or download here.
