The S&P 500 was down last week, largely on concerns that there is a lack of political will on both sides to resolve stimulus talks before the election. The market is still up over 2% for October after falling in September.
We continue to get questions about the market and the election. There are several Nobel prizes in economics that have been awarded around efficient markets and modern portfolio theory. Of course, the “modern portfolio” we are talking about is now almost 70 years old. These economic theories all assume that markets are efficient, that is, that all information is available to fairly price securities. That information is used to make rational decisions to buy or sell. And, in the long run, the markets are efficient and work.
It’s the short run that we’re dealing with here. And in the short run, humans step in and we are most definitely not rational. We buy and sell based on fear and greed. More recent Nobel prizes in economics have been awarded for behavioral finance, or how our human brains and biases impact our decision making.
There is a tremendous amount of research that shows that the stock market returns are not impacted by which party sits in the White House. The best years for growth have been times when the government is split, and one party controls the Executive Branch, and the House and Senate are either split or controlled by the opposing party. In the short run, the reelection of an incumbent typically results in higher growth. However, it’s important to keep in mind that growth in the market – or lack of growth – has correctly predicted every election in modern history, with the exception of Jimmy Carter’s loss to Ronald Reagan. Which means that presidents are generally reelected with the markets are doing well, so you would expect higher growth when that happens.
Either way, the markets are going to be efficient and work in the long run. If you are saving for retirement or another goal that’s a few years or longer away, just stay the course. Make sure your portfolio is aligned with your goals and your risk tolerance and resist the urge to tinker with it in the short run. The election dust will settle in a month or so, and companies will continue to produce products and services that people buy, generating profits and growth.
Now, if you have extra funds that you can easily lose, the same money you might be willing to risk at a casino or some highly speculative venture, and you want to make a bet that one side or the other will win or lose, and the markets will react by moving up or down, go ahead and make that bet. But remember that making a bet is not the same thing as investing. Investing is, by definition, a long-term proposition.
Have more questions? We have some great resources, including calculators, videos and articles on our website at covingtonalsina.com, or visit our Facebook page to learn about our line-up of educational events.
Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Great Valley Advisor Group, a Registered Investment Advisor. CovingtonAlsina and Great Valley Advisor Group are separate entities from LPL Financial.
All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
The opinions voiced in this show are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which strategies or investment(s) may be appropriate for you, consult with your attorney, accountant, and financial advisor or tax advisor prior to investing.