Updated: Jan 12
Should you be worried about the impact the election may have on your investments?
Is it time to put your money under the mattress?
This is a question I am receiving a lot lately. While I cannot predict the future, what I can say is history has demonstrated that volatility surrounding elections is generally shorter-term. An article recently published by Blackrock reveals that over the long-term, the stock market has continued to rise no matter who is in office. Another article published by Vanguard further reinforces the idea that attempting to avoid loss by predicting a downturn results in a negative impact on portfolio returns when compared to maintaining a long-term perspective with a disciplined investment approach. Further, a study published by Invesco revealed that from 1947 through 2017 major government programs rolled out by either political party (i.e. Medicare, Medicaid, Affordable Care Act) had no material impact on the performance of the Dow Jones Industrial Average.
The Fed vs. Congress.
So what actually has more of an influence on the potential performance of your investments? The answer is Monetary Policy. In short, Monetary Policy refers to the levers the Federal Reserve can pull to help stimulate the economy. Guess who is accountable to the general public and is mandated to act independently of their political affiliation -- the Federal Reserve.
One example of levers "the Fed" can pull to stimulate the economy is determining what interest rates will be. On the 16th of this month the Federal Reserve released commentary which revealed they intend to keep interest rates low, at least through 2023. While low interest rates aren't good for savings account holders or bond investors, they work out really nicely for people who want to borrow money to purchase goods and services. When business owners and individuals have the ability to use someone else's money "cheaply", they are more inclined to spend. Americans spending money = businesses making money = rising stock values. Low interest rates can also entice people to invest their own money instead of spending it, because the interest paid on a loan is much lower than the potential return on an investment in the stock market.
Yes, volatility may happen.
According to commentary published by Goldman Sachs, options markets are currently pointing towards a volatile fall in anticipation of the election. It's undeniable the divide is great between Trump and Biden, Republicans and Democrats. It is not uncommon for certain partisan outcomes to be perceived as more favorable to investors than others. If you look to major economists and analysist opinions you will find there is a 50/50 split on their outlooks. There are a lot of unknowns hanging out there regarding COVID, political agendas, etc. However if we examine what has happened throughout history, political policies only represent a modest portion of the factors which drive stock market performance. What has consistently proven to provide investors with the most favorable outcomes is to remain focused on their goals for the long-term and to manage investment risk with a disciplined approach. If you are unsure of what this means to you or are concerned about how you are positioned, now is a great time touch base with your advisor about your portfolio.
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All investing is subject to risk, including possible loss of principal. Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income. Diversification does not ensure a profit or protect against a loss. Past performance does not guarantee future results, which may vary. The value of investments and the income derived from investments will fluctuate and can go down as well as up. A loss of principal may occur.
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