If you’re feeling anxious about the U.S. presidential election, you’re not alone.
Media coverage has reached a fever pitch as the seemingly never ending presidential campaign hits the final stretch to the November 3 vote.
It’s hard not to get caught up in what’s going on south of the border, especially because many of the issues at stake have implications for Canada, including the handling of the pandemic, the Black Lives Matter movement, the state of the economy and the politics of climate change.
With all the turbulence, it’s also natural to wonder how the election might affect your investments, particularly during a such a volatile year in the markets. Certainly, there’s no shortage of predictions from commentators about how the markets will react to the results, especially if they are contested.
The election will be extraordinary in many ways, but using history as a guide, your investments should be fine. As a Vanguard publication on the topic put it: “Elections matter, but not so much for your investments.”
Vanguard analyzed 150 years of market returns to see whether a relationship existed with electoral events, examining both returns under Republican and Democratic presidents and whether election year uncertainty led to lower returns and/or higher volatility.
Using an allocation of 60% equities and 40% fixed income, Vanguard found no statistically significant return differences under Republican and Democratic administrations or between presidential election years and non-elections years. Any differences were “likely attributable to randomness, or noise.”
The study also showed that volatility of the S&P 500 index was actually marginally lower in the 100 days before presidential elections and the 100 days after elections.
A classic investing error is to make decisions on the belief “that this time will be different.” There do seem to be legitimate reasons to believe the 2020 election could actually be different, starting with President Trump’s unprecedented effort to cast doubt on the integrity of the election process and refusal to commit to a peaceful transfer of power if he loses. However, you don’t have to look that far back in history to remember that George W. Bush won the presidency over a month after election day when the Supreme Court finally rendered its judgement.
The question is: What are we supposed to do with this information? Investors have a tendency to zero-in on one variable, such as the presidential election, in trying to predict where markets are headed, when the reality is so much more complex.
A multitude of other factors affect the markets, including interest rates, the state of the economy or developments in other parts of the world. Adding to the complexity is the impossibility of forecasting what impact any of the different factors will actually have on markets.
The conflict and uncertainty the U.S. election is generating can be unsettling, but it is not a reason to deviate from your long-term investment plan. It’s been designed to capture the returns the markets produce over time despite bumps big and small along the way, while holding enough safe investments to see you through.
