Don’t Let Election Drive Investment Decisions

The campaigning and the commercials are just about over – and Election Day is upon us. As a citizen, you have something at stake in this election, and in every election. But as an investor, should you really be that concerned over who wins the presidency?

You might think so, if you listen to all the claims coming from both parties. And yet, many of these charges and counter-charges are just rhetoric. Here’s the bottom line: Individual investors have done well and poorly under both Democrats and Republicans. Ultimately, the good health of the financial markets – and, by extension, your investment success – depends on a variety of factors having relatively little to do with who’s in the White House.

Looking ahead

Does a presidential election have any impact on the markets? Yes. If an incumbent wins, the stock market typically has performed a little better over the next year – but that’s often because the markets don’t like the uncertainty caused by change. And this positive effect is really a short-term reaction.

Over the longer term, a particular administration’s policies can have some effect on the economy, which in turn affects the markets. But it’s far from clear just how much control any president has over economic forces. And not infrequently, an administration’s actions may not even have the desired economic results.

So, as an informed investor, don’t let Election Day determine your future moves. As you look ahead, then, what “big picture” factors should inform your decision-making? Here are two to consider:

*Corporate profits – As a determinant of stock prices, corporate profits matter greatly – today, tomorrow, next year and next decade. Corporate profits are a key driver of the financial markets. If you want a fairly dramatic illustration of this point, you need only look back a few years, to the late 1990s, when “dot-com” stocks were all the rage. Investors couldn’t get enough of these companies, which seemed fantastically full of potential. However, potential is not profitability – which is something many of these companies lacked. And in 2000, this problem caught up with these stocks: Their prices plunged, and the fall helped drag down the entire market.

*Sustainable economic growth – If you want to see what might lie ahead for the financial markets, you might want to watch the progress of our economy. In general, a sluggish economy is not particularly good news for investors, particularly those who invest in stocks. At the other end of the spectrum, an economy that’s too hot can lead to inflationary pressures and movements by the Federal Reserve to raise interest rates – events that may also bring mixed results to investors. Consequently, you and other investors might want to hope for a “Goldilocks” economy – not too hot, not too cold, but just right.

Vote your conscience

If you want to have a voice in how your government is run, you need to vote – it’s that simple. The winner of the presidential election can play a huge role in shaping the issues of the day. But, as we’ve seen, other factors are likely going to be more responsible for determining the investment outlook for the next four years. So, when you enter the voting booth, let your conscience – not your brokerage statement – be your guide.