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Election Results and the Markets: Why Retirees Shouldn’t Worry Who Wins in November

The 2020 presidential election is the most contentious in recent memory, which is unsurprising given the high stakes. Whoever wins will be tasked with leading the United States through the aftermath of COVID-19, guiding the economic recovery from the pandemic, and maintaining the nation’s position on a shifting global stage.

One of the biggest questions for retirees is how the election results will affect your retirement savings plan. How much impact will the election have on the stock market? Is a Republican or Democratic winner better for your portfolio? Should you alter your investing strategy as the election approaches? If you’re asking these questions, you’re not alone.

Rather than reacting to fear or uncertainty, it’s essential to understand the implications of potential election outcomes and remember that it’s just one factor in the big picture of retirement planning. Here’s why. 

The Market Rises Under Both Parties

Republicans’ fiscally conservative policies have traditionally been seen as better for the economy. The thinking is that pro-business policies such as lower taxes and deregulation lead to growth, both in the stock market and the overall economy.

However, market performance over the past 75 years doesn’t support that idea. In fact, the stock market rose under all but two presidents over that time, regardless of party affiliation. Democratic administrations presided over the two biggest bull markets since World War II and didn’t account for any significant periods of economic stagnation.

Based on this data, it seems that uncertainty due to external factors - not politics - is the biggest driver of economic downturns. How the next administration responds to the pandemic and civil tension could negatively impact the markets, but it’s unlikely their party affiliation will be the cause.

Presidential Policy Has a Limited Economic Impact

While the POTUS and their platform serve as the focus on economic policy, their power to effect change is limited. There are a variety of factors that cause market shifts, but three groups have the greatest impact:

  • Congress - Any candidate can run on the promise of new economic policies, but Congress is ultimately responsible for writing and passing legislation. A unified and cooperative Congress gives the President more leeway to make sweeping changes. But a partisan and fractured Congress may do little more than keep the government running. The U.S. does not radically reengineer the economy, the system is built for incrementalism.
  • The Federal Reserve - Monetary policy has more impact than Presidents. Interest rates are a critical factor in economic policy, as even a small change in rates can lead to significant shifts in the stock market. The Federal Reserve has unique power, as they’re responsible for balancing inflation, economic growth, and the labor market.
  • The Private Sector - Innovation can significantly impact the markets, causing shifts in labor, manufacturing, and spending. Over the coming decade, the realization of concepts like self-driving vehicles and artificial intelligence could bring widespread economic changes. While a President can support these initiatives, they’re mostly powerless to guide, implement, or take credit for them.

    Three Potential Outcomes for the Election

    Setting aside highly improbable events, such as the GOP re-taking control of the House of Representatives, there are three possible election results to consider: 

    Republican President with a Split Congress

    If Trump wins re-election and Republicans maintain control of the Senate, the result would essentially be continuing the status quo. Congressional gridlock would make any sweeping legislation unlikely, and executive orders are mostly ineffective for implementing financial policies. 

    Markets would respond positively to a continued focus on low taxes and decreased regulation. However, Trump’s volatile foreign trade policies are a significant risk factor. Most modern supply chains are highly dependent on global trade, and further use of tariffs could slow the economic recovery from COVID-19.

    Democratic President with a Split Congress

    Like the above scenario, a Biden victory with a mostly Republican Senate would lead to limited economic policy changes. The scope of any legislation would depend on a willingness to compromise by Senator McConnell and his Republican peers. 

    We could see a small increase in taxes and regulation, but increased stability on the world stage would offset that. Markets crave predictability, and a split Congress would likely be able to agree on infrastructure initiatives to spur economic growth.

    Democratic President with a Democratic Congress

    A “blue wave” at the ballot box, where Democrats take control of the White House and both chambers of Congress, would provide the most potential for economic and fiscal changes. Tightening of spending and increased regulation - hallmarks of Democratic administrations - tend to spook markets, especially the financial and defense industries. 

    However, stability in global trade policy will be a boon, and a focus on addressing climate change, including renewables and clean energy, provides an immense opportunity for growth.

    How to Protect Your Retirement Savings, No Matter Who Wins

    Avoid predictions. Turn down the volume and recognize that the media gets paid for you to watch more media. The easiest way to keep you engaged is through fear. The markets don’t care if you like who’s President.

    While the upcoming election is important, the direct impact on your retirement plans should be minimal. The stock market tends to rise over time regardless of which party is in power, and major policy changes take months, if not years, to implement.

    The best way to protect your retirement savings is to stick to your investment process. Your portfolio was created based on your vision, values and goals. To change your portfolio based on predictions and speculation would be a fool's errand. It’s time in the market that matters, not timing the market. 

    There will be growth in various sectors under either a Trump or Biden administration. But more importantly, a solid financial plan is built to withstand economic and political changes. A trusted financial advisor can help you plan for market changes, identify opportunities as they arise, and provide a roadmap to thriving in retirement, regardless of who’s in the White House.

    Looking for more information on how to protect your retirement savings through political and economic uncertainty? Get the 2020 Essential Retirement Guide today

    2022 Essential Retirement Guide

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