The presidential election dominates American headlines every four years, with a bombardment of political articles running throughout campaign season up to the November vote. Financial publications and broadcasts also ride the waves of fear and optimism, as analysts break down the implications of each potential administration.
However, historical market data suggests that these analyses overlook equities’ tendency to perform especially well in election years, regardless of the outcome. Moreover, the data suggests that most casual retail investors should have longer-term outlooks focused on more consequential economic indicators.
ELECTION-YEAR MARKET TRENDS AND PATTERNS
The Standard & Poor's 500 Index rose in more than 85% of presidential election years from the 1960s through 2012, while 12-month gains were only achieved in just under 75% of all other years. The only instances when losses coincided with presidential elections were 2000 in the aftermath of the dot-com bubble and 2008 during a global financial crisis.
There is no clear pattern regarding the effect of either party on equity markets. The relationships have changed over time, and different studies offer contradictory evidence. Average election-year gains lag non-election year returns by nearly 200 percentage points. Volatility is usually higher in months preceding an election, and the market has indicated significant preference for incumbents. There is some historical evidence that suggests a new president taking office actually has a negative impact on returns, though external economic factors also muddle this data.
THE VALUE OF DIVERSIFICATION AND A LONG-TERM HORIZON
These studies primarily serve to assuage fears and reinforce the importance of a long-term views and diversified portfolios for retail investors. The market may or may not rise due to the election, though history does provide grounds for optimism.
Importantly, investors may want to set their political passions aside and view capital markets as a complex entity dictated by a wide range of global factors, many of which are far more relevant than the commander in chief of the United States.
Rather than letting a political affiliation dictate bullishness or bearishness, investors should consider monitoring a balanced set of factors, such as monetary policy, energy prices and corporate earnings. Asset allocations should be dictated by suitability in the context of time horizons, investment goals and risk tolerance. We believe exchange-traded funds remain excellent low-cost vehicles that give investors diversified equity exposure in line with the recommended long-term approach.
POTENTIAL IMPACTS ON TRADE AND SPECIFIC SECTORS
Seasoned investors may want to consider some of the more specific potential impacts of the presidential election. Strong showings from Republican presidential and congressional elections could lead to an appeal or significant alteration of the Affordable Care Act. This would directly impact the finances of insurers, facilities and care providers.
Hillary Clinton has communicated support for climate control agreements, renewable energy investment and restricting the Keystone XL Pipeline. This could affect supply or demand for fossil fuels in the United States.
Both candidates have given support to populist calls for trade restrictions, which could have negative long-term effects on economic growth, especially if trade partners respond unfavorably with protections of their own. Any new restrictions could distort the current competitive balance among importers, exporters and domestic producers. These considerations are likely below the scope of concern for the majority of investors, but they potentially could help active asset managers driveattractive returns.
WILL THE ELECTION IMPACT YOUR INVESTMENTS?
No matter what the economic conditions, FlexShares wants to help investors stay informed and make better investment decisions. Learn more about How the Presidential Election Year Will Affect Your Portfolio.
For more information on ETF investing, contact FlexShares at 1-855-FLEXETF (1-855-353-9383) or visit FlexShares.com.
 Winkler, Matthew A. “Investors Like Election Years, No Matter Who Wins.” Bloomberg View. August 1, 2016.
 Tepper, Taylor. “How the Election Will Really Affect Your Investments.” Time.com/Money. June 22, 2016.