Just in case you thought politics could not get any crazier, a global pandemic sweeps in. The United States has lost 26.5 million jobs in less than two months.
Gross Domestic Product (GDP) is expected to drastically shrink in the short-term. Nine out of ten Americans are deeply concerned about the economy right now. On top of this generational event, there is a Presidential election slated to occur in November.
The outcome of the election and the coronavirus pandemic could affect your stock holdings and retirement account.
Read on to learn how an election year may impact your portfolio.
Historical Stock Market Performance
Over the last 40 years, the stock market has not really cared what political party the President belongs to. There is conventional wisdom out there that republican presidents are better for high net worth individuals. Historically, this is not true and high earners have thrived regardless of the president’s party
Under President Bill Clinton, for example, the Dow Jones Industrial (DJI) increased by nearly 230%. President Barack Obama was widely feared as too progressive and bad for wealthier Americans. The truth is that the DJI increased by nearly 150% during his 8-year tenure.
Republicans have also been good for the stock market. Under President Ronald Reagan, the DJI increased by over 147% from 1980 to 1988. Before the coronavirus pandemic shut down the United States, the stock market was soaring under President Donald Trump.
The moral here is that you should not get too wrapped up in the outcome of the election. There will be buying opportunities and savvy investors are likely to thrive regardless of which party controls the White House.
When President Trump was elected in 2016, there was an initial panic. Investors were concerned about his policies, specifically regarding free trade. As a result, Dow futures plunged nearly 900 points after Trump was announced as the election winner.
What happened next is just one example why you should not overreact to election results. The next day after Trump’s win, however, the DJI finished the day up 250 points.
In the first year of the Trump presidency, the DJI increased by over 32%. This positive result was the second-highest increase in DJI’s long history.
Reacting to election results is purely speculative. The truth is that we have no idea how a presidency will unfold. Who could have predicted that the vibrant economy under President Trump would be under assault by a global pandemic?
Stock Market Cycles
Instead of emotionally reacting to an election, professional investors are seeking out their next opportunity. The stock market has natural cycles. There are times when the stock market grows in tandem with the U.S. economy.
In other cases, the stock market grows too fast and becomes overpriced. When this occurs, a stock market correction can take place.
The technical definition of a correction is when stocks drop by 10% or more. Corrections are temporary and the stock market will eventually come back and start growing again.
Currently, the DJI and other major indices are in correction territory. The Federal Reserve has taken extraordinary measures to keep the stock market from falling even further.
In general, financial experts identify four phases of a stock market cycle. Continue reading for a brief explanation about each cycle and how it affects current traders:
This phase presents the most opportunity for savvy investors. The accumulation phase begins when the market bottoms out.
Many panicked investors make the mistake of selling their holdings to minimize losses. The seasoned veterans are there to pick up the pieces and buy at a value.
This is why it is important for professionals to manage your portfolio. Individuals are more likely to be influenced by doom and gloom reporting in the media. They act with emotion rather than experience.
During the current economic climate and political calamity, a steady hand is more important than ever. A professional will determine when the market hits bottom and identify attractive new holdings.
During the mark-up phase, stocks are now on the rise. The market, in general, has stabilized and previously rattled investors are moving back in.
The market has moved into bull territory. This surge in volume drives stock prices up to irrational levels.
However, the professional class is starting to see the signs of overvalued stocks. The stock prices are no longer in line with reported earnings. They start to move holdings out of high-risk equities and into safer investments like bonds.
Bullish sentiment is giving way now and sellers are cashing out. The overall sentiment on the market is mixed.
Here, trading ranges are established. The stock market will move up and down, but stay within the range. The distribution phase could last several months or even longer.
The final phase in the stock market cycle is the painful decline. We are now trading in bear market territory. Those that hold positions throughout the distribution or early mark-down phase are taking a beating.
Savvy investors are ready to pounce. Professionals are trained to spot the trading floor and buy up opportunities. Those are who fortunate enough to buy at the bottom will enjoy the ride on the subsequent mark-up phase.
Election Year Analysis
You are likely asking, what phase are we in now and how does the political climate impact the stock market cycle? Only a financial professional can read the complex data to know the right answer.
When the stock market started tumbling, it certainly appeared that the market was in a mark-down phase. However, the Fed intervened and the market may have bottomed out.
The election adds a new wrinkle to professional analysis. If Joe Biden wins the Presidency, he could opt to raise taxes or extend the nationwide shutdown guidance.
These decisions could override the Fed intervention and send the market down again. However, in the long run, we know that the impact of Presidential elections is overrated. So long as you are patient and savvy, you are likely to benefit over time and reap handsome stock market returns.
If you want to learn more about financial planning during an election year, contact us today to schedule a free consultation.