Election years are a major concern for investors. The fiscal, foreign, and domestic policies of presidential candidates and parties can have a profound influence on the economy. Financial professionals and retail investors alike keep a close watch on their policy leanings. Many adjust their investments accordingly.
But are election years good for the stock market? The past few election cycles can give us a good idea of what might change. But, like anything else, the answer is more complicated than you’d expect.
Let’s explore what recent history can tell us and what it might mean to invest during an election year for those who want to diversify their portfolio with a Gold IRA.
STOCK MARKET HISTORICAL PERFORMANCE DURING ELECTION YEARS
It’s too early to speculate on who will win the next election, but trying to game the stock market based on potential outcomes is typically a fool’s errand anyway. A lot can happen between now and January 2025. What we can do, however, is look at historical trends for the U.S. market and how it performs during election years.
U.S. MARKETS TEND TO RISE DURING ELECTION YEARS
Historically, U.S. stock markets have shown an inclination to perform positively during presidential election years. Since 1952, the S&P 500 has averaged a 7% gain in an election year. That’s a modest gain, especially when you compare it to the average gains observed in the year preceding an election (16.8%) and the typical annual total returns for the U.S. stock market.
Ultimately, this behavior underscores a pattern of market resilience and optimistic investor sentiment during periods of potential political change.
But what about re-election years, when an incumbent president is seeking a second term? The S&P 500 has not experienced a decline in re-election years since 1952, posting an average annual gain of 12.2%. This historical data suggests a tendency for the stock market to thrive during the electoral cycle, despite the inherent uncertainties that accompany elections.
INVESTING BASED ON SPECIFIC POLICIES MAY PROVE TO BE RISKY
It can be tempting to invest based on what you anticipate might happen in an election. You might think that specific policies could cause the value of your investments to skyrocket (or plummet). But it’s a risky strategy that could do more harm than good. The market ebbs and flows, and it’s important to realize that before you start moving your money around.
Political platforms and the sectors they influence have an extremely mutable nature. What’s more, unprecedented impacts of global events (like the COVID-19 pandemic) make specifically highlighting market performance in an election year a difficult proposition.
Instead of trying to game the market based on who may or may not win an election, consider instead diversifying your investment portfolio. Because specific sectors can fluctuate dramatically from one election to the next, a steady hand might better suit your strategy.
MARKETS DON’T CARE WHICH PARTY IS IN OFFICE
The truth of the matter is that market performance under different presidential administrations performs consistently. The stock market (and particularly the S&P 500) tends to rise over time, regardless of which political party holds power.
Yes, policy changes and political events can influence short-term volatility. But long-term trends typically result from a complex interplay of factors that extend far beyond political affiliation. Economic fundamentals, corporate earnings, and global events (like the pandemic or Great Recession) have a more pronounced impact on market movement.
What this shows investors is that the stock market has a built-in resilience to political change.
TOP-PERFORMING SECTORS DURING ELECTION YEARS
Which stocks tend to perform best during election years? The financial services and energy sectors have often been big winners, especially since 1973. The tech sector, meanwhile, tends to fall flat during an election year. The only part of the market that has performed worse than tech stocks is materials.
If you have concerns about your investments and how to align your strategy with these trends, consider speaking with your financial advisor or investment planner. They can help guide you toward stocks and exchange-traded funds (ETFs) that might suit your goals.
CONSIDER INVESTING IN GOLD DURING VOLATILE MARKETS
Within the context of election years, investors have historically perceived gold as a safe haven asset. Its allure typically stems from the reputation for stability among economic fluctuations and geopolitical tensions. Gold performance has historically demonstrated resilience during election cycles. It has either maintained or increased its value.
Gold can offer a sense of security to investors who are wary of stock market swings. It’s an excellent investment vehicle for retirement portfolios, provided you follow the rules and seek out the right precious metals for your IRA.
This article originally appeared on Advantagegold.com and was syndicated by MediaFeed.org.
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Government Debt, Inflation & 7 Other Reasons Exchange Rates Change
An exchange rate is how much of a given nation’s currency you can buy with a different nation’s currency. If you purchase foreign goods or travel abroad, you may need to convert your currency to another country’s money.
Exchange rates are a critical measure of a country’s financial health, and they constantly shift as the demand for a particular currency increases or decreases.
Many factors go into and can cause them to change. For instance, a currency’s value might go up or down due to international trading, policy decisions, investor expectations, the political climate, and the overall economic conditions of the home country.
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Pinpointing what causes exchange rates to change isn’t straightforward. Even the most accomplished economists sometimes struggle because of the many interrelated factors involved.
There are two main exchange rate systems — fixed and floating. In a fixed exchange rate system, a government or central money maintains a currency’s value, allowing little to no fluctuation. In contrast, floating exchange rates are based on current supply and demand forces within the foreign market.
Many things affect the supply and demand of a currency (and thus its value), including inflation, interest rates, stock market performance, and government debt.
Let’s dive into nine reasons why exchange rates change.
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Inflation occurs when the cost of goods and services increases, decreasing the purchasing power (and actual value) of a currency.
Typically, the perceived value of the money will decrease as well, deterring investors from buying it. As the currency loses its buying power and becomes less attractive in the foreign market, the exchange rate will likely drop in favor of stronger currencies.
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Interest rates play a major role in a currency’s value and are an essential part of a country’s monetary policy. Governments often adjust interest rates to manage inflation and economic growth, which can push a nation’s exchange rate higher.
For example, a government will often raise interest rates in a high-inflation economy, discouraging borrowing and encouraging saving. Over time, prices for goods and services drop, enticing consumers to start buying again. This typically causes the currency to appreciate, resulting in a higher foreign exchange rate.
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A country is in a recession when its gross domestic product (GDP), the total market value of all final goods and services produced within its borders, drops for two consecutive quarters. Often marked by high unemployment, a recession causes everyone to pinch pennies, including foreign investors.
When a nation’s economy is weak, its currency loses international appeal. As a result, the exchange rate will typically drop until the country’s financial situation improves.
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As investors try to earn a profit, their speculation on a currency’s value could cause the exchange rate to change.
Suppose investors believe a nation’s money is overvalued. They might sell their holdings to cash out before an anticipated dip, potentially driving down the currency’s value. On the other hand, if investors think a currency is undervalued, they may go on a buying spree that causes an artificial price hike.
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The performance of a nation’s stock market is a significant indicator of its financial health and, thus, a potential cause of exchange rate fluctuations.
Stocks outperforming investor expectations is a sign of a strong economy. This makes a currency more appealing to foreign investors. Conversely, an underperforming stock market might drive foreign investors away from a currency.
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When a country’s economy is unstable, its money typically loses value on the international stage. Political instability often leads to the same result.
Political unrest and division create uncertainty, potentially discouraging foreign investors from investing in that country’s currency or businesses. Political instability can also drive up inflation, disrupt production and exports, and force governments to spend more. This combination can hurt a currency’s value.
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A current account measures the money coming in and out from selling goods and services to other countries. The current account has a deficit if the nation imports more than it exports and borrows foreign currency to operate and grow.
While a current account deficit can benefit a country, it could eventually cause the nation’s money to lose value. Foreign investors may pull back if they don’t predict a high enough return on their investment, ultimately resulting in a lower exchange rate.
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Terms of trade (TOT) measures the ratio between a nation’s export and import prices. When export prices increase faster than import prices, the country’s revenue goes up, as does the demand for the nation’s currency. As more people want to buy the currency, the value increases.
When import prices increase faster than export prices, the opposite happens. The country’s revenue, currency demand, and exchange rate decrease.
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Governments sometimes take on debt to fund national improvements. However, too much debt might make a country’s currency less attractive to foreign investors.
Investors might speculate about the country’s ability to repay its debt, potentially leading to high inflation or a weaker currency. A poor credit rating can add to those concerns.
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What are the causes of fluctuating exchange rates?
There are many causes of exchange rate fluctuations. Generally, exchange rates change when a country experiences economic or political shifts.
What are the factors affecting the exchange rate?
Factors that affect the exchange rate include but aren’t limited to economic standing, speculation, stock market performance, political stability, current account status, terms of trade, and government debt.
Is it better for the exchange rate to go up or down?
Generally, it’s better when the exchange rate for your nation’s currency goes up because it indicates a strong economy. However, another country’s currency losing value can be an opportunity to purchase an investment that may appreciate in the future.
This article originally appeared on WesternUnion.com and was syndicated by MediaFeed.org.
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