By Jacobson Truex

Every election cycle brings uncertainty, often leading investors to wonder: What is the best approach for my portfolio? I have heard time and time again, from clients on both sides of the aisle, that this election “feels different.”

Regardless of who wins, historical trends show that the markets respond in distinct ways following an election. Understanding these trends can offer valuable insights for investors planning their moves in the months to follow and longterm positioning.

The first month in

In the aftermath of an election, markets typically experience heightened volatility. Investors react to the news with optimism for anticipated policies and trepidation over potential fiscal and regulatory agendas. Historically, November can see bigger swings, up and down, as the market adjusts expectations. The Dow saw a strong expansion in November 2016 with a 5.3% increase and in 2020 with an 11.8% increase. 

When a Democrat wins, there is often an initial wave of cautious optimism in sectors like green energy, healthcare and infrastructure as investors may anticipate increased spending in these areas. Conversely, when a Republican wins, defense, traditional energy and financial sectors may see early support, with expectations of deregulation or favorable tax policies. However, these trends are not concrete. Market reactions can vary widely depending on other economic factors, such as interest rates, unemployment rates and broader global conditions.

For the average investor, this is a time for patience. Avoid making significant changes to your portfolio based purely on immediate post-election volatility. This period is often reactive, and short-term price movements may not accurately reflect the market’s medium- to long-term trajectory.

Three months later

The three months following an election can provide a clearer view of how the market perceives the new policy agenda. Analysts and investors have usually begun to settle on realistic expectations for priorities, and sectors likely to benefit or suffer under the new leadership start to show more defined trends.

For investors, the three-month period is a good time to reassess portfolio holdings with an eye on potential policy changes, but with a cautionary approach. While some trends may become clearer, the actual impact of policies can take years to materialize. Instead, prioritize your long-term goals and avoid making reactionary moves that do not align with your overall strategy.

Six months later

By the six-month mark, the market often reflects a more realistic view of the administration’s impact as concrete policy actions typically take shape. This period can reveal the legislative priorities and markets respond accordingly, either by settling into patterns or, at times, undergoing further adjustments based on early policy outcomes and the economic environment.

By this point, investors can reassess their positions with greater confidence in the policy direction. This is an opportune time to make strategic adjustments rather than reactive moves. For instance, if green energy is anticipated to grow under the new policy, consider whether a longterm position in health care aligns with your goals. Alternatively, if fiscal conservatism is a policy priority, financial services or traditional energy might offer stability and growth opportunities.

Many investors consider the first six months of a Democrat-led White House as a period where growth is moderately favorable, often buoyed by government spending initiatives and infrastructure projects aimed at economic stimulation. Under a Republican administration, the first six months often see market optimism driven by deregulation and tax cuts, particularly benefiting large corporations and sectors like finance and energy. It is important to note that six months is a very short time in the investing world, and your long-term considerations should supersede shortterm expectations. 

Strategies for the long haul

• Focus on fundamentals: The most successful investors do not chase trends but invest in companies and sectors that are well-managed, have sound financials and demonstrate a history of resilience. Regardless of which party holds office, solid investments are likely to withstand political cycles and continue to deliver returns.
• Diversify across sectors: Elections can shift focus across various sectors. A balanced portfolio that includes exposure to both growth-oriented sectors and more traditional sectors can help weather political shifts.
• Stay informed, but don’t react emotionally: Market sentiment can shift quickly with each new policy announcement, especially in the first six months. While staying informed is critical, avoid making decisions based solely on short-term political developments. Remember, long-term growth is often achieved by holding through periods of volatility rather than attempting to time the market.
• Consider dollar-cost averaging: If you are concerned about volatility, dollar-cost averaging – investing a fixed amount regularly – can help reduce the impact of market fluctuations. This approach is especially useful if you are nervous about deploying a large sum of money in uncertain political climates.

Elections, while impactful, are just one of many factors influencing the market. Political transitions create new challenges and opportunities, but history has shown that the markets are resilient and adaptable. By focusing on longterm strategies, you can navigate post-election periods with greater confidence. Ultimately, a balanced, diversified portfolio, guided by sound investment principles, remains one of the best defenses against the uncertainty and volatility elections can bring.

The information referenced in this article does not represent a recommendation for any type of security transaction.

The writer is vice president and a financial advisor at McLaughlin Ryder Investments.