In this episode of Nurturing Financial Freedom, we discuss how the markets responded to the certainty brought by the recent Presidential election and what history suggests about post-election market performance. While maintaining a nonpartisan lens, we explore the relationship between political outcomes and financial markets.
Ed starts by analyzing market movements in the week following the election. He highlights that the clear election outcome brought a sense of relief and stability to the markets, avoiding the prolonged uncertainty seen in prior cycles. This certainty spurred optimism, particularly around potential corporate tax extensions and reduced regulation, both of which are expected to support corporate profits. Financial stocks and small-cap U.S. stocks were notable outperformers, buoyed by deregulation hopes and domestic market focus, respectively. However, bonds and international stocks underperformed due to rising bond yields and a strengthening U.S. dollar, which hurt returns on foreign investments.
Alex then shifts the focus to historical trends, emphasizing that while markets typically perform well post-election, this is consistent with broader market behavior rather than directly attributable to election outcomes. He notes that since 1980, nine of 11 post-election years saw positive market returns, averaging 15.6%, higher than the overall market average. Yet, these gains often stem from broader economic conditions rather than the Presidency itself- correlation does not mean causation!
He reminds us that the stock market, like a nimble speedboat, can react quickly to news, whereas the economy, more akin to a massive aircraft carrier, changes direction only with significant events. Regardless of political shifts, long-term economic fundamentals and corporate earnings drive market performance. Again, reactionary changes to investment strategies based solely on political outcomes are unwise.
The discussion closes with a look ahead, noting that volatility can increase under a new administration but isn’t guaranteed. Historical examples, such as the quiet markets of 2017 following Trump's first inauguration, illustrate the unpredictable nature of post-election market behavior.
Throughout, we stress the importance of focusing on long-term investment strategies rather than short-term political or market fluctuations. For personalized guidance, Birch Run Financial invites listeners to reach out through their website or social media channels.