Investors are better off leaving politics at the polls. Here’s why
New York
CNN
—
Keep calm and trade on, that's the mantra many investors are repeating to themselves through one of the most turbulent news weeks of the year.
Tuesday is election day in a tight race to determine the next president of the United States. On Thursday, the Federal Reserve will announce its next interest rate decision, the first since officials cut interest rates by half of a percentage point and since unemployment data revealed a weakening labor market.
Still, investors don't appear to be letting their jitters get to them, at least not entirely.
Markets were volatile on Monday and ultimately closed lower as traders failed to find solid footing ahead of this week's news. But that doesn't mean investors are feeling pessimistic: Market gains year-to-date through October have been the strongest in any election year since the 1950s, when the S&P 500 was first created.
"These gains are supported by an economy that remains resilient and forward earnings that reached yet another record high," wrote Keith Lerner, chief market strategist at Truist, in a note Monday.
October's jobs numbers disappointed Wall Street, but many investors expect that the setback is temporary and due to extreme weather events like hurricanes Helene and Milton. Plus, economic data shows that Americans are still spending money. The US economy grew more than expected in the third quarter of 2024, and much of that growth came from strong consumer spending, which was at its highest level in over a year.
Lerner expects some trading churn this week but nothing too dramatic. "Elections matter, but other factors tend to matter more for markets in aggregate," he wrote. "Regardless, our view is investors should continue to focus on the primary trend and try to filter out the short-term noise."
While Vice President Kamala Harris and former President Donald Trump have divergent economic proposals and visions, economists are urging investors to vote at the polls and not with their portfolios. Congress, meanwhile, could end up again divided, making it difficult for whoever the next president is to implement any significant economic or budget changes.
Regardless, market performance is far more dependent on where we are in the economic cycle when a new president and Congress take office than on any party or candidate, said Brent Schutte, chief investment officer at Northwestern Mutual Wealth Management Company. "That's because at almost $29 trillion, the U.S. economy is too big and complex to significantly sway from its natural trend rate of growth."
"It's best for traders to continue their focus on fundamentals," said Dave Sekera at Morningstar. "Valuations at the market level and individual stock level are always the key to long-term performance. You may have a lot of noise in the short term, but for long-term investors, it's always going to be all about valuation," he said.
An election year analysis from Danny Noonan at Morningstar Wealth found that investors are significantly better off in the long run if they ignore politics.
If someone began investing in the S&P 500 with $1,000 in 1953 and put that money in the market when a Democrat took the highest office, sold when a Republican became president and then reinvested when a Democrat returned to office, they'd have $62,000 today, Noonan found. If they reversed the strategy and invested only when a Republican was president, they'd have $27,000.
If they had simply remained invested in the S&P 500 throughout and refrained from trading based on their politics, however, that $1,000 would have grown to about $1.7 million today.
As Americans cast their ballots and Wall Street awaits the Fed's decision, markets may see short-term volatility. But veteran analysts note that the US economy's long-term strength has empirically transcended any single election or administration.
For investors, that suggests the best strategy may be to keep calm, trade on, and leave the politics at the polling place.
