U.S. presidential elections always influence laws, policies, and foreign relations, but what kind of impact do they have on the stock market? And more importantly, how could these changes affect you?
These same questions also interested Stock Trader’s Almanac founder Yale Hirsch, who spent years analyzing market data and identifying any patterns that appeared to repeat during election cycles. What Hirsch uncovered in his research later led to his development of the presidential election cycle theory. Here’s what Hirsch found: the stock market performs the weakest during the newly-elected president’s first year, rebounds in the second year, peaks in the third year, and then falls in the fourth and final year of that presidential term. This cycle repeats in the next presidential election, and so on.
This might seem like too much of a coincidence, but Hirsch’s theory elaborates more on these connections. In the first year, the president’s focus is typically on their core policy proposals and appealing to the interests of the people that helped get them elected. Their focus later shifts to the state of the economy towards their fourth year in hopes of being re-elected. Hirsch has found that these outcomes are pretty consistent across the board, regardless of political party.
Although the stock market tends to perform well overall during an election season, the months leading up to an election are usually volatile. Investors should prepare for periods of stagnation, among other factors. Here are some investment strategies to consider to maintain a strong portfolio during an election season.
Get Into Cash
Since election seasons could elicit volatility, investors might consider getting into cash and waiting out the market until it settles down again. Diversifying your portfolio with cash investments can also be a good option to pursue with other factors, like the COVID-19 pandemic, influencing the market outside of election seasons.
Create a List
While waiting for the dust to settle, you can start building a list of companies you’d like to potentially invest in once the market rebounds. Volatility can be unnerving, but it often creates lucrative investment opportunities that investors can benefit from. Consider working with a financial consultant who can help you prepare a strategy that won’t only benefit you during the current market but the future market as well.
Stay Calm
It’s easy to let uncertainty cause alarm and concern, but staying calm is the best thing you can do for your portfolio. Do not lose your focus and let hysteria diminish all the hard work you’ve put into your investments. You’ll be glad you held fast to your approach once the market rebounds.
Many factors can influence the stock market, including election seasons, but understanding how these factors affect the market and your investments can help you take advantage of the opportunities they present and give you greater peace of mind.
