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How the Presidential Election Could Affect the Stock Market & Your Portfolio

The U.S. election could affect the stock market with volatility. Use your long-term investment goals as your guide.

https://tickertapecdn.tdameritrade.com/assets/images/pages/md/Waves: Preparing investment portfolio for election volatility
5 min read
Photo by Getty Images

Key Takeaways

  • Manage expectations by sticking to your long-term investment goals

  • Think beyond the immediate election; contemplate long-term impacts and fundamentals

  • Identify implications for your portfolio if either presidential candidate should win

Wondering how the upcoming election could affect the stock markets? For investors, a good way to think about the November election is to consider it as an event, much like a storm. Do you want to ride through the storm on a jet ski, which could have some rewarding thrills but carries a high risk of falling off and getting injured? Or do you want to go through the storm in an aircraft carrier, barely feeling jostled but, admittedly, with no adrenaline rush?

To answer this, look at your portfolio. Now think about your investing goals, which will be your guide for choosing how best to navigate the storm of the stock market and election. If you’re investing for the long haul, you might want to stick to a holistic financial plan and avoid being heavily weighted in any one sector, even if it might reward you with a thrill as you ride the wave. Whether your portfolio goals are income growth, capital appreciation, retirement planning, or something else, keep your objectives firmly in mind.

Then perform a bit of scenario analysis. And finally, remember the big picture. There’s politics at the national level, the local level, and lots of stuff in between.  

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Manage Your Expectations

If you try to invest based on the outcome of the election, consider your long-term goals. Will any changes you make force you to veer off course? Will your strategy be jeopardized? Think of the big picture. You don’t want to ride out a storm with all of your eggs in one basket, which can leave you more exposed to damage. 

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Think Beyond the Election to Fundamentals

How much could your investments be affected by the election? Will it be business as usual regardless of who sits in the White House or controls the Senate? Do you have exposure to sectors that could be impacted for better or worse depending on the outcome? What about taxes?

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Focus on Risk to Your Portfolio 

If history—and specifically 2016—is a guide, we should expect some market volatility (see figure 1). Don’t forget we still have to navigate through the COVID-19 pandemic and recession as well. Too many concentrated positions can leave you open to risk, so watch for policies that might affect your portfolio.

Market volatility in 2016; Brexit and U.S. elections
FIGURE 1: A VOLATILE 2016. The last presidential election cycle saw its share of volatility in the major indices, including the S&P 500 Index (SPX, candlesticks)—first with the vote in the UK to leave the European Union (“Brexit”), and then again around the election in the United States. The purple line shows the Cboe Volatility Index (VIX), which rose above 20 on a few occasions. Data sources: S&P Dow Jones Indices, Cboe Global Markets. Chart source: the thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.
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Let’s Try Some Scenario Planning 

This is a lot to think about. So let’s look at an example of a well-documented policy and create two scenarios, one for each candidate. We can use environmental policy platforms, not because of any specific controversy, but because the candidates have each been very clear on their opposing positions.

We know from his website and platform that former Vice President Joe Biden supports developing new nuclear technologies to help fight climate change; ending new federal land oil and gas leases; and implementing taxes to reduce carbon emissions.

President Donald Trump has publicly stated that he wants to continue to increase the use of fossil fuels, support energy development on federal lands, and maintain easier pollution-control policies that favor businesses and manufacturing.

Both platforms have short-term and long-term implications, but how could they impact your portfolio? Of course, this is where the merits of a diversified portfolio and asset allocation come into play. Ask yourself if it will be business as usual under these policy scenarios. Might any of these policies impact your strategy in the long run? Are you overweighted anywhere that could heighten your risk? You should only need to pivot if your investing goals are in jeopardy.

Try the same exercise with tax policies or other major issues on which the candidates have opposing positions.

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Elections Outside the White House

It appears from early polling that the House of Representatives will likely remain under Democratic control, but questions remain about whether Republicans will continue to control the White House and the Senate. If there’s a sweep, today’s rhetoric from candidates is more likely to become policy. If our current mix of political control continues, it’s probably safe to assume that enacting policy changes will be more challenging for either presidential candidate.

It’s been said before, but it bears repeating: Markets have up days and down days. You can’t control any of that. Focus on what you can control, and seek someone who can act as a coach or sounding board. Long-term financial planning is much like other personal goals, such as losing weight, eating healthier, or running a marathon (not a sprint). Discipline matters.

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Key Takeaways

  • Manage expectations by sticking to your long-term investment goals

  • Think beyond the immediate election; contemplate long-term impacts and fundamentals

  • Identify implications for your portfolio if either presidential candidate should win

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