To answer that, let’s look at some statistics. Clearly, some evidence indicates equity markets being a bit more volatile in election years, with greater value swings. Going back to 1974, the median market volatility in election years is about 15%, while the average volatility for all years is 12%.*
We see similar historical results when measuring average daily market price volatility. If we assume a base line of 100%, we see that, in election years, the average daily market price volatility increases to 116%.**
In other words, we recognize the potential for increased volatility in election years. It may not necessarily happen -- but the potential clearly exists. And, in general, volatility in the marketplace equates to higher anxiety among individual investors, who see more radical swings in equity prices.
Given these factors, we revisit the questions: “Does this matter to our portfolios? Should we be paying attention to it?”
My answer is that we should remind ourselves of the factors that drive the market over the long term – fundamentals like a company’s revenues, earnings, profit margins, return on equity, and so forth. These underlying financials, over time, are what determines a company’s stock price. And it is the long term that we should be planning for.
As a financial advisor, I recognize market volatility – whether in an election year or any other time – as a possible short-term opportunity to rebalance a portfolio or to buy into a company when the price is lower.
In the important long-term view, however, I don’t believe potential market volatility in election years is any reason to change one’s investment strategy. In the long run, we are trying to create a balanced portfolio that is matched to a client’s goals, timeframe, and investment risk tolerance. In short: stick to a disciplined, long-term strategy.