Do Elections Impact Financial Markets?

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Economy  |  November 7, 2016  |  

During Bill Clinton’s 1992 Presidential campaign,  in order to keep the campaign on message, James Carville hung a sign in Clinton’s Little Rock campaign headquarters that read:

  1. Change vs. more of the same
  2. The economy, stupid
  3. Don’t forget health care

Its ironic that after 25 years, these could be the biggest issues in the current election cycle.   Investors are concerned about the outcome of the election and have taken a defensive posture.   According to the Reuters Global Asset Allocation poll, cash and bond allocations are near the highest point in six year, and equity allocations are near the lowest levels in the same period.  Concerns about the direction of the financial markets seem priced in based on this data.

Neither Presidential candidate has more power than the laws of economics.  Guessing the impact of an election on the direction of financial markets is futile.  The economy has, does and will determine the future of financial asset prices.  Regardless of your political views, the checks and balances in the U.S. political system have played an important role in preventing what most people fear when they take drastic action with investments ahead of a major election.  Policy can change expectations in the short run but in the long run the actual performance of the economy is king.

I won’t downplay the risks of some financial assets.  The Reuters poll shows bond allocations are at a multi-year high in a period when rates are at lows and there is building evidence of the return of inflation.  This is a bad recipe for fixed income.  Markets have been shaped by artificially low interest rates imposed by easy monetary policy.  Regardless who wins the election, they will have a challenging task of pulling back stimulus and allowing economic growth to stand on its own merits.