With the election, you probably saw some pretty dramatic predictions about what would happen to the economy if one side or the other wins.
While the outcome of this particular election was hard to predict (not just nationally, but for state and local offices as well), economists identified some market behavior that was sure to occur.
Just the fact that there is an election tends to increase uncertainty. Investors don’t like uncertainty. And so it tends to make them react more strongly to market information.
“In the absence of a clear consensus about the (election) outcome,” writes economist Clive Walker, “we see larger daily price changes that seem to offset each other.”1
In other words, we might see bigger swings both up and down, but in the long run stock prices will likely remain largely unchanged.
Businesses also don’t like uncertainty. One study found that U.S. firms tend to reduce investment expenditures during election years, which can depress the market. On the other hand, older research suggests that politicians often attempt to boost the economy before elections.
Uncertainty can continue after the election, as everyone waits to see what new policies will be enacted by the winners. These changes are most likely to affect industries that are sensitive to government spending. This includes sectors like healthcare, defense, and finance. Additionally, new tax policies will also have some effect.
While politicians may promise a chicken in every pot and a new car in every garage, the economy is just too complex and economic cycles are simply too long to guarantee immediate prosperity. However, economic promises resonate strongly with voters, so politicians are not going to stop making them.
Knowing this, the prudent investor won’t be overly optimistic or overly worried about how the election will affect his or her portfolio.
If you ever have any questions about your investments or retirement plans, please feel free to give me a call at 801-545-0696.
Regards,
Mark Lund
Stonecreek Wealth Advisors, Inc.
11576 S State Street, Bldg. 1002
Draper, UT 84020
Sources:
1. http://go.pardot.com/e/91522/ctions-affect-the-stock-market/95p293/2481654731/h/B6gVVSMb7rEXwS3QnO9CK_bLeOuISTXSEX2E2LNDlvs
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