Investing

How will the 2020 election affect your portfolio? Probably not as much as you think

Twenty/20

With less than a year until the 2020 U.S. presidential election, Wall Street is already debating who will be victorious — and how the outcome might affect the stock market.

Some prognosticators have thrown out bold claims, particularly about Democratic candidate Senator Elizabeth Warren. Hedge fund legend Paul Tudor Jones said he expects the S&P 500 will tumble 25% if she wins the 2020 election, while billionaire investor Leon Cooperman predicted a similar market slump if either Warren or Senator Bernie Sanders is elected.

That said, similarly dire predictions back in 2016 didn't come true. Prior to President Donald Trump's victory, Wall Street types predicted that his election would cause market "carnage" or even a 50% plummet in stock prices. In a nine-day stretch leading up to and following the 2016 election, the S&P 500 fell 3.1%, but then it quickly bounced back.

And since Trump took office, the S&P 500 has risen about 36%. That's less than the 47% it gained during a comparable period of President Barack Obama's first term, but still a strong showing.

Here's what a presidential election can mean for your investments.

The president and your portfolio

Markets can be surprisingly resilient, even impervious, to politics. While a four- or eight-year term may seem like a long time, it's not for stocks. In the past 40 years, only one resident of 1600 Pennsylvania Avenue, President George W. Bush, saw the U.S. stock market decline during his tenure.

Since 1928, only two other politicians have seen the market end up lower on their watch. The S&P 500 crashed about 77% during Herbert Hoover's time in office and 30% during Richard Nixon's presidency, according to data from Macrotrends.

How the market has fared under recent presidents
Bill Clinton's two-term presidency saw the best S&P 500 returns in the past 40 years.
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kiersten schmidt/grow2 FactSet

The reason why the market typically goes up during each party's tenure is because presidents have time on their side. While stock prices may fluctuate in the near term, historically they tend to go up. In the past 90-plus years, the S&P 500 has delivered average annual returns of about 10%.

"Even though market participants talk a lot about how the election can affect the market, the historical evidence is it's very hard to draw a conclusion between the regime that's elected and what happens in the market," says Tom Martin, senior portfolio manager at Globalt Investments.

Expect market turbulence ahead of the election

That said, there could be some bumpiness in coming months as the market considers the implications of who will win the 2020 election. And the platforms of some Democratic candidates could cause more turbulence in specific industries, like technology, financial services, or health care industries, says Eric Freedman, chief investment officer at U.S. Bank Private Wealth Management. That's because traders may believe the revenue prospects for these companies may take a hit if policies endorsed by these candidates are implemented.

"As we get into the turn of the year, and more importantly the late spring and summer of 2020, that's when we think investors and voters will be very focused on economic performance and how the stock market is doing," Freedman says.

VIDEO3:0303:03
How do economic cycles work?

Video by Courtney Stith

And the impeachment probe adds a layer of uncertainty that could lead to more dramatic ups and downs in the stock market during this election cycle.

"Typically with presidential elections, the market really starts to focus on them a couple months beforehand," says Willie Delwiche, investment strategist at Baird.

"Rather than three months of that uncertainty, we're looking at having a year-plus of that," he predicts. "There's very much a general election mindset in the market right now."

Rather than making major changes to your portfolio now based on the news, use the time leading up to the election as an opportunity to make sure you're well diversified, Freedman says. In addition to a mix of stocks in various industries, investing in bonds can help balance out your risk.

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