Trump or Harris? It may not matter to investors.
October 2024
Australians like others will be glued to TV screens on November 6 (local time) as United States election polls close. But, for investors, it may not matter who is declared the next president.
History shows the checks and balances built into the US system of government make it hard for individuals and parties to enact sweeping change. As a result, the impact of politics on US markets has been limited.
US stocks, for example, have moved higher in election years regardless of which political party held office.
Traditional diversified portfolios – often called 60/40 portfolios – have also delivered gains in most presidential-election years. The same may occur in 2024 and long-term investors could do well to stick to their existing strategies.
The only loss in an election year was in 2008 when the global financial crisis, not the presidential poll, drove markets down.
Russell Investments recently analysed three scenarios to show the average one-year and three-year gains of a US$100,000 investment starting in the year following a US election year.
In the first scenario, an investor with a balanced portfolio (60% shares/40% fixed income), stays true to their investment plan and is rewarded. They experienced gains averaging US$12,300 and US$35,200 over the one-year and three-year periods following an election year.
The second investor waits to see how markets react to the new administration. They move to cash for the first six months of the year following an election year, then subsequently move back to a balanced portfolio. Unfortunately, their annualised return lagged the investor who stuck to their plan over both the one-year and three-year periods.
The third scenario depicts an investor who could not bear to be invested due to the uncertainty under the newly appointed administration. This investor remains in cash in the years following the election and experienced an extreme setback to their overall wealth. Their gains over both the one-year and three-year periods were one-third that of the investor who remained invested.
Understanding that financial markets tend to be influenced by economic cycles, rather than political parties, is an important part of investing.
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