From Kiplinger · · 3m
Political Dread and Portfolio Strategy
Election volatility often leads investors to sell stocks, but historical data shows long-term gains from staying invested.
In brief
Election volatility often leads investors to sell stocks, but historical data shows long-term gains from staying invested. Investors should avoid shifting portfolios due to elections, as historical patterns show stocks rise after elections regardless of party control. Originally reported by Kiplinger.
Quick answers
- Why Sell During Elections?
- The unusual volatility around elections can be largely explained by investors' fear that losses may emerge from political change.
- What is the key takeaway from Political Dread and Portfolio Strategy?
- Investors should avoid shifting portfolios due to elections, as historical patterns show stocks rise after elections regardless of party control.
Election Volatility
The day after Democrats won control of both the House and Senate, the Dow jumped 3%, its best post-midterm day since 1982.
Market Plunge Follows
A day later, stocks plummeted, and semiconductors plunged more than 12%, their worst day since the COVID-19 crash.
Historical Pattern
In 2020, stocks posted their worst week since the March sell-off of that year the week before the election, then their best election week since 1932.
2022 Election Pattern
In 2022's midterm season, stocks rose before the vote, plummeted after, then rallied hard to end the week.
2024 Election Pattern
Stocks nerves going into the 2024 election also proved fleeting, with the market staging a historically strong surge second only to the 2020 rally in the week after the election.
Unsupported Fear
Investors appear to be once again falling into what has become a common pattern of allowing politics to spook their portfolio strategy, despite the fact that in all of those recent cases, investor nerves around…
Long-Term Stock Performance
Stocks were up at least 15% in the year after each of the last three elections.
Historical Probability
Probabilities favor a positive outlook in general, stocks have risen in the year after elections nearly 75% of the time since 1928.
Party Independence
Likewise, U.S. stocks tend to rise regardless of which party holds the White House or how Congress is split.
Historical Investment Example
By the end of 2024, $100 invested in the S&P 500 at the end of WWII grew to about $37,000, but if that same $100 was invested only when a Republican president was in the…
Partisan Investment Risk
If invested only when a Democrat led the country, it rose to just $4,000.
Why Sell During Elections?
The unusual volatility around elections can be largely explained by investors' fear that losses may emerge from political change.
Political Promises
Republicans and Democrats alike suggest they will shepherd markets toward better returns while the opposing party is doomed to fail, creating a fear of losses in the investing public.
Loss Aversion
Humans are extremely averse to loss, and the fear of it creates irrational investing behavior.
Behavioral Biases
Economists have shown that we hate losing money even more than we like gaining it.
Recency Bias
Election weeks are a perfect storm for behavioral mistakes like recency bias, which leads us to project the latest move far into the future.
Market Volatility
One large drop or a series of volatile days starts to feel like the beginning of a crash.
Market History
Intriguingly, market history shows the opposite is more likely: high volatility tends to cluster around bottoms in equities rather than at tops.
Availability Heuristic
The availability heuristic makes vivid, constantly repeated news seem more important and more likely than it really is.
Herding Behavior
Finally, herding pulls us toward doing what everyone else seems to be doing. We naturally assume the crowd knows more than we do.
What it means
Investors should avoid shifting portfolios due to elections, as historical patterns show stocks rise after elections regardless of party control.
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