How Do Elections Really Impact Our Economy?
By Patrick W. Ryan, CFP®, AWMA®
Whether you love election time or are feeling a bit exhausted by the constant coverage, most of us can agree that the US Presidential Election has a strong influence over the nation and the world. Every four years, the “election effect” shifts our attention and often unconsciously changes our decision making. Even if you decide to swear off news coverage completely, the “election effect” can still unknowingly impact your life through economic conditions.
The markets and presidential elections are so closely intertwined, that since 1932, an incumbent US President has never failed to win re-election unless a recession has occurred during their time in office. The strong correlation between the two factors does not necessarily provide crystal ball predictability to the current election, but it does demonstrate how market conditions could have an impact on how people cast their vote.
While the Federal Reserve holds the majority of power over monetary policy such as interest rates and alterations in the money supply, and the President has to work within the limits of our system, presidential candidates hold a great deal of power in their influence, how they present themselves in their campaign, and the verbiage used. The euphoria created by campaign rhetoric tends to impact how voters spend and invest their money.
Since voters tend to become invigorated before an upcoming election with the promise that their selected candidate will improve the economy in their own way, investors also tend to assume better times ahead. In fact, in a 2004 peer-reviewed study in the Graziadio Business Review, financial analyst Marshall Nickles, EdD, found that the stock market often has made major dips about two years before presidential elections and has risen through the end of election years. He revealed, for the period from 1941 through 2000, Stock market lows have occurred surprisingly close to mid-year congressional elections or approximately two years before presidential elections.
However, some disagree with the claim that elections provide a clear picture of the overall performance of the current market. Keith Lerner, the chief market strategist at Truist/SunTrust Advisory, explained that “Elections matter, but other factors matter more,” he says. “From the market’s perspective, progress or lack thereof on [coronavirus] vaccines are going to be more impactful than who’s in the White House over the next year — or several years.”
Looking at historical averages, other factors outside of the election cycle, such as wars, bear markets, and recessions, which also tend to occur within the first 2-years of a presidential term, can have a stronger effect on the economy. The influence of these outside factors may skew data and make it difficult to use elections as a predictor of overall economic growth or decline.
In general, the economy works in cycles, with periods of expansion and contraction. Factors such as gross domestic product (GDP), interest rates, total employment, and consumer spending, can help to determine the current stage of the economic cycle. The presidential election is just one factor within many which can impact our economy.
During these uncertain times, it can be helpful to reach out to your advisor to make sure that your plan for a lifetime is on track with your current needs and financial goals. Our team is here to assist.
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