Historically, Election Day has always been rife with uncertainty for investors. How will you plan for a Donald Trump market?
Initial drops in the market around election time are fairly normal. It can be difficult to determine exactly how the market will act over the course of a president’s term, or which investors will benefit the most.
After Obama’s win in 2008, for example, the S&P 500 fell by 5.27%. It fell again (2.37%) following his reelection in 2012. However, the Obama years have been among the best for equity investors.
Likewise, the S&P 500 gained 1.12% the day following George W. Bush’s re-election in 2004, but the next four years were less favorable to some investors.
So how will the market respond this time around, now that president-elect Donald Trump is set to take office in January?
And more importantly, what can you do to make sure your investments are protected no matter what happens?
Here’s what you need to know…
Plan for the Long-Term
On the day of the 2016 election, U.S. stock futures tanked. Though many investors panicked, the market rebounded the following day after it was announced that Donald Trump would become the 45th president.
In fact, the Dow marked its biggest weekly rise in 5 years post-election, surprising many market pundits. But these ups and downs in the market during national events are fairly common. A similar occurrence happened during the recent U.K. Brexit – a decline after news broke followed by a swift rally.
But unlike Brexit, some market strategists believe that Trump’s presidency could actually lift risky asset prices as well as nominal interest rates for U.S. equities. Bonds, on the other hand, don’t look quite as optimistic. Strategists believe that Trump’s policies may continue to boost inflation, which would erode the value of interest payments on long-term bonds.
However, they also note that it’s still too early to tell for sure, and that inflation may not fluctuate too far after this point.
As with any major historical event, the presidential election will lead to some uncertainty, and strategists urge investors not to panic. The best advice is to plan for the long-term. Keep an eye on the market over the next four years, not just over the next four weeks.
Look to Steady Income Sources
Historically, market performance has remained relatively unchanged whether a Republican or Democrat is in office.
In fact, a review of the 3,000 largest U.S. stocks by Fidelity Investments found that market gains were 12.2% on average during a Democratic presidential term versus 11.8% during a Republican one.
This means that as long as your portfolio isn’t shaped based on who’s in the Oval office, you should be fine. If you’re choosing stocks now, your best bet is to look for options that have little to no impact on events coming out of Washington.
For now, some of the most debated stocks are healthcare companies, as they’re likely to be disrupted by Trump’s plan for reforming the Affordable Care Act.
Likewise, they note that pharmaceutical companies could see a benefit from Trump’s plan, though they warn that it’s still too early to know for sure. Ultimately, you don’t want your portfolio to be dependent on the whims of legislature.
The best move for investors is to choose stocks in companies that already have a long-standing track record of financial stability through multiple election cycles.
Don’t Rely on Emotions
Elections often hold either positive or negative emotions depending on how you view the results, and this election was certainly no different. Despite the president-elect’s promises, his policies are still unproven, and no one can really predict what the future holds.
Investing is often a struggle between logic and emotion, and many market strategists warn that investors should avoid making rash, emotional decisions that could affect the market unnecessarily.
It shouldn’t be a surprise that market returns during an election cycle tend to be lower than years immediately preceding it. Humans tend to be guided by emotion, and the time during an election is when emotions are going to be most tied to election results.
However, historically speaking there is almost always a return to normalcy once those emotions have settled. And no matter which side of the political spectrum you fall on, smart investors plan accordingly and stick to the basics no matter who wins.
The reality is that the stock market will always be in a state of fluctuation, no matter who is in the White House. If you’re a smart investor, you’ll avoid reacting to those fluctuations when they happen.
The best scenario for your portfolio is to stick with a well-designed investment strategy and adjust as needed (And if you still need a solid investment strategy, the Snider Investment Method can help you through this uncertain time).
While election cycles are notoriously rocky throughout history, you don’t have to rely on a fluctuating market to see returns over the next four years.
If you’re a cash flow investor, the best thing you can do is to remain calm and stick with your investment strategy. Your strategy should take into account any major fluctuations and changes and plan for long-term yields over time.
Your stock choices should also be based on companies and industries with a proven track record of success that have ideally already weathered the storm of previous elections.
If you’re not sure that your portfolio meets those criteria, consider taking one of our free courses to help guide you through the ups and downs of investing during the current election cycle.
And if you’re not already a cash flow investor, we urge you to seriously consider it. You can learn more about the benefits of cash flow investing here.