Elections often stir up strong emotions, and it's easy to feel like the outcome of a vote or change of government will make or break the market.
But markets are just not that simple.
Markets are driven by fundamentals like earnings, interest rates, and innovation.
But as investors, how we feel about the market can be swayed by our political affiliations, and sometimes these feelings can lead us to make decisions that aren't in our best financial interest.
How Politics Can Impact Our Judgement
The influence of political bias was explored in a 2012 study titled "Political Climate, Optimism, and Investment Decisions".
The study found that individuals tend to be more optimistic, and perceive markets as less risky, when their preferred political party is in power.
On the other hand, they become more pessimistic when the opposing party holds office, and this bias affects investment behaviours.
For instance, during market downturns, investors aligned with the ruling party are more likely to see declines as temporary setbacks.
While those aligned with the opposition may see the downturns as signs of deeper economic issues, prompting premature selling or portfolio adjustments.
Real-World Example
Consider the 2025 market downturn, where the S&P 500 dropped 15% from its February peak.
Financial advisers observed that investors' reactions were split along partisan lines, where supporters of the incumbent administration viewed the decline as a short-term issue.
Opponents, on the other hand, feared long-term economic repercussions, leading to hasty investment decisions.
This kind of reaction isn't new.
If we consider history, markets have performed well under both Democratic and Republican administrations in the US.
From 1945 to 2020, for example, the S&P 500 averaged annual gains of 11.2% under Democratic presidents and 6.9% under Republicans.
This tells us something important: that long-term market performance is more influenced by economic cycles than political leadership.
The Cost of Letting Politics Drive Investment Decisions
When you let political views shape your investment strategy, it can lead to costly mistakes.
Trying to time the market based on election results, reacting emotionally to headlines or making decisions based on political shifts can significantly impact your returns.
The biggest cost here is the lost opportunities, because by jumping in and out of the market based on your fears or hopes, you risk missing the long-term growth that you get from staying invested.
Focus on What You Can Control
As a financial planner, I always remind clients to focus on their long-term financial goals rather than short-term political developments.
My advice is to resist the urge to react and make decisions based on the latest news cycles because markets are resilient and have historically rewarded those who have remained patient and stayed the course.
While political events can influence investor sentiment, it's crucial to recognise and mitigate these biases to make sound financial decisions.
If you'd like to chat about strategies to safeguard your investments from emotional biases or discuss how to align your portfolio with your long-term goals, feel free to reach out, we’re here to help.
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