Every election cycle brings a wave of predictions about what markets will do next. Headlines become more dramatic, political uncertainty dominates the news, and investors are often left wondering whether they should make changes to their portfolios before the dust settles. The recent general election and US Midterm elections were no different.

While elections can certainly create short-term volatility, history suggests that reacting emotionally to political events is often more damaging to long-term investment outcomes than the events themselves.

Why Elections Can Create Market Volatility  

Financial markets dislike uncertainty. In the lead up to an election, investors consider a wide range of possible outcomes, including changes to taxation, government spending, regulations, trade policy and international relations.

As opinion polls shift and campaign promises evolve, markets can experience increased volatility as investors attempt to price in different scenarios. Certain sectors can be particularly sensitive. For example:

• Infrastructure companies that may benefit from increased government spending.  

In the period immediately following an election, markets can also experience sharp moves as investors reassess expectations and digest the implications of the result.

The Reality: Markets Adapt 

While election outcomes can influence market performance over shorter periods, businesses continue to focus on serving customers, generating profits and creating value regardless of which party is in power.  

Many investors are often surprised to learn that some of the strongest stock market returns in history have occurred during periods of significant political uncertainty. Markets are forward-looking mechanisms that constantly adjust to changing conditions.  

Over the long run, factors such as earning growth, innovation, productivity, and economic expansion tend to be far more important drivers of investment returns than any single election result.  

Discipline and Financial Goals 

Long-term financial objectives, whether retirement, education funding or generational wealth creation, are usually measured in years, if not decades. However, other goals may be shorter term – whether awaiting settlement on the purchase of a home or saving for an overseas vacation.  

Investors cannot control election results, policy decisions or market sentiment. Investors can, however, control asset allocation, diversification, and they way that they react to the results.  

Successful investing has rarely been about predicting outcomes. More often, it has been about remaining disciplined, maintaining a long-term perspective and staying invested throughout the good times and the bad.  

For everyday investors, the most effective response to election uncertainty may be the simplest one: focus on your plan, ignore the noise, and remember that markets have navigated political uncertainty many times before.  

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