As the United States gears up for its presidential election, all eyes are on the stock market and financial sector. With the COVID-19 pandemic, an economic recession, and a country divided on key issues, it’s an understatement to say this year’s election is pivotal. Investors are watching closely and so should you.
If you’re new to the world of finance or just need a refresher on how elections impact markets, this guide is for you. Here are what you need to know and what to watch for as results come in on Election Day:
1. Market volatility is expected.
As an election approaches, uncertainty increases, and the stock market can be volatile. As we saw in the 2016 election, market swings can be drastic. Wall Street hates indecision, and the prospect of a new administration can create jitters in investors. However, it’s important to remember that short-term volatility does not always reflect the true state of the economy.
2. Choose a long-term strategy.
Short-term market movement might be erratic, and investors may want to take a pause and evaluate their long-term strategy instead. Often, the best approach during times of volatility is to stay the course. Investing is a long-term game, and those who work on their strategy to achieve their long-term goals tend to fare better.
3. The market is not an indicator of the election’s result.
Just because the market goes up or down during the election does not mean that the election is trending in that direction. While stock markets tend to have their rhythm, it is important to remember that they do not vote. In fact, the past has shown that the stock market is not an accurate indicator of the election’s outcome.
4. Every election is different.
The markets are affected differently during each presidential election. There have been cases where markets have surged and other cases where the markets have dipped. With every election, there are specific issues that impact the markets. This year, for example, we can expect COVID-19, tax regulations, and the possibility of a new stimulus package, making this election more unpredictable than ever.
5. The electoral college and swing states are essential to watch.
The electoral college will play a significant role in this election. Each state contributes a certain number of votes in the electoral college based on population size. A candidate needs a minimum of 270 electoral college votes to win the presidency. Swing states are a set of states that could potentially go for either candidate. These states are considered a significant factor in determining the outcome of an election. One should monitor the results coming in from these states to make an informed investment decision.
6. The split government can have a financial impact.
If the presidency, House of Representatives, and Senate are not aligned in any one direction, it could result in a split government. This situation could lead to gridlock and would make it difficult for the government to implement any changes. It could be better for investors due to political inaction, but it could also result in uncertainty if there is no clarity about the country’s direction.
7. Impact on specific industries.
While the stock market tends to react together, there are specific industries, such as healthcare, energy, and technology, that may feel the brunt of policy changes or regulatory decisions. For example, the healthcare industry and pharmaceutical companies are watching this election closely because healthcare policy is a significant talking point in this election and can impact their stocks.
FAQs:
Q1. How will the election result impact the stock market in the long run?
A1. Although it is challenging to predict the market’s movement in the short term, investors should bear in mind the long-term implications of the election result. One should evaluate if the policies enacted under the new administration will positively or negatively affect their investment strategy.
Q2: Will the election results impact my short-term investment decisions?
A2: While the election period may be a volatile time for the markets, it is essential to focus on one’s investment strategy, which is suited for the long-term. Short-term fluctuations are expected, whether one chooses to hold, sell, or buy based on their investment strategy, should not be swayed by the market’s short-term volatility.
Q3: What sectors should I watch during the election?
A3: Investors should keep an eye on the sectors that will be most affected by the policies enacted, such as healthcare, defense, and energy. Investors can also consider tech and communication sectors as they are more resilient to policy changes.
Q4: What will happen to the market if there is a contested election?
A4: If the election results are contested, markets could become more volatile due to the uncertainty. This is not the first occurrence of a contested election, but it could make investors nervous in the short term. Investors should keep an eye on the legal battles and not make hasty decision based on short term trends.
In conclusion, the presidential election can be a volatile time for investors. Still, it’s essential to note that short-term market movements may not reflect the long-term financial landscape. One should have a long-term strategy, staying the course during market volatility, and only making financial moves based on research and evaluation. Most importantly, investors should refrain from making any hasty decisions and remember that investing is a long-term game.
