Political Bias and Investor Behavior
We can’t completely remove bias from our investment behavior. Most of us have a political persuasion, even if it’s independent. And we sometimes think that if our candidate or party is in power, the economy and the market will do well, and if the other candidate or party is in office, the reverse is true.
As we have pointed out numerous times in this series, that is not a good way to make investment decisions.
Mid-Term Election Ads and Market Uncertainty
As the mid-term election draws closer, we are about to be swamped with political ads hitting our TV, radio, and social media pages. The messages will range from negative to outright dire. Candidates, political parties, and special interest groups will spend millions trying to convince voters that if they make the wrong choice in the voting booth, the world as we know it will end.
The political fight, and the uncertainty over election results, is likely to impact your investments. But, it is also likely to be short-lived, regardless of who wins and loses.
S&P 500 Historical Returns by Presidential Term Year
Take a look at this chart from LPL Research.
These are the historic returns of the S&P 500 index in each year of a President’s first term. While the long-term averages are positive in all four years, the worst performance is in a mid-term election year, gaining just 4.6% on average. These years also typically have the most volatility, and the biggest average max drawdown of 17.5%.
Post-Midterm Election Stock Market Performance (Year 3)
But, let’s focus on year 3. In the year after a mid-term election, the Index is up on average 14.3%, with the lowest average max drawdown of 11.2%. In fact, the S&P 500 Index has risen during the 12 months following mid-term elections 18 straight times back to 1954.
The pattern here is clear. Political uncertainty peaks ahead of an election and begins to fade once the outcome is known. And that’s regardless of the winners and losers.
LPL Research Outlook: Split Congress Scenario
This time around, LPL Research has a base case that the outcome of the mid-term election is a split Congress. That can be a good thing for the stock market. A divided Congress suggests gridlock. Radical change is not likely. At the same time, it could create more volatility around key issues like government funding and the debt ceiling, and shift emphasis on policy decisions toward the executive branch.
Bottom Line: Fundamentals Over Political Headlines
Bottom line for investors is to stay focused on fundamentals and not headlines. The economic environment remains unchanged by politics. We continue to see resilient economic growth, strong AI-driven capital investment, and continued earnings expansion. Those things matter most for your investments, despite what any doomsday political ad may claim.
Securities are offered through LPL Financial, Member FINRA/SIPC. GenWealth Financial Advisors is an other business name of Independent Advisor Alliance, LLC. All investment advice is offered through Independent Advisor Alliance, LLC, a registered investment adviser. Independent Advisor Alliance, LLC is a separate entity from LPL Financial.
