The Election and Your Portfolio: Separating Fact from Fiction on Market Impact

With the upcoming election dominating the headlines, many investors wonder if they should adjust their financial plans amidst political change. More specifically, investors are contemplating how the U.S. presidential election could impact stock market returns.

Historically, the stock market’s long-term returns are not meaningfully impacted by which party wins the presidential election. There simply isn’t any conclusive data indicating that one party is better for investors. The reality is that robust stock market returns in the U.S. are the economic envy of the rest of the world regardless of whether a Republican or a Democrat controls the White House.

Political Polarization and Confirmation Bias

Major news media often insist that one party’s win or loss in the election will significantly impact the stock market, so be prepared to digest the media’s take with a grain of salt. It’s important to remember that the news media is an industry that profits from ratings, rather than correctly making directional calls on the stock market. News outlets seek to maximize their viewership by targeting readers and viewers from one political party and capitalizing on the audience’s confirmation bias.

Confirmation bias is a behavioral bias which holds that the human mind tends to irrationally filter information to align with existing beliefs. Accordingly, consumers tend to gravitate toward election news and information that is consistent with their political affiliation. This leads to a predisposition toward viewpoints that predict an economic boom if one party wins, and doom and gloom if it loses.

With only a relatively small percentage of voters who remain undecided, there simply isn’t much of an audience for data-driven viewpoints. Instead, pundits often tilt toward one party or the other using sensationalist headlines to increase their engagement and popularity.

Don’t Fall Victim to the Illusion of Control

Emotions tend to run high in election years, which is why market volatility can also surge around elections. It’s only natural to be concerned about geopolitical events, but allowing such concerns to affect investment decisions is not prudent.

It’s critical to avoid falling victim to the illusion of control bias. This cognitive bias often leads people to overestimate what they have control over. Sometimes, this bias will manifest itself by driving investors to attempt to game the market, even though academic studies indicate that those attempts are likely to be counterproductive.

The illusion of control bias can also lead politicians to attempt to convince voters that their vote in the election will have a much more significant impact on the economy and the stock market than what history has shown.

Historical data points to a reality where the U.S. economy and capital markets are forces beyond the control of political parties. Many politicians would prefer you buy into the illusion that they have control over the country’s economic future, but these assertions aren’t backed by evidence.

Investors can combat this bias by focusing on fundamentals and sound investment principles like diversification and compound interest. These principles have withstood the test of time and have proven reliable ways to deliver value with financial planning.

Know What Is and Isn’t Within Control

Maintaining a long-term orientation can be difficult when there’s an election on the horizon that could bring big changes to the country. But it’s in times like these that a pragmatic stock market investor will focus on issues that the election could likely change while not buying into the illusion that politics control the U.S. economy. Market growth and resilience remain steady regardless of election outcomes, so it’s crucial to stay focused on your long-term strategy and avoid being swayed by the headlines.

Differentiating between fundamentals (that impact investments) and noise (that doesn’t impact investments) is more critical than ever. If you could use some help separating factors within your control from those beyond your control, consider harnessing the expertise of a CERTIFIED FINANCIAL PLANNER® professional to help your finances. Find your CFP® professional today at LetsMakeAPlan.org.