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Three Common Concerns Clients Have During an Election Year and How to Address Them
It’s an election year, which means you cannot avoid politics. There are debates and rebukes, polls and pontifications, and clients who want to talk politics. Should you? Yes and no. Investors have political sentiments, which often impact their ability to stay calm and invested over the long term. They have fears about how policy changes will affect taxes, health care costs, social security, and investment returns. Ignoring their political concerns could cause more harm than good and lead to hasty decision making. However, there is a way to talk about politics without being political. We advise staying focused on research and combatting widely spread myths to help your clients fight their fears and stay focused on their long-term financial plans.
Concern #1 – The U.S. stock market is weakest in the year after the election of a new POTUS.
Remember the Presidential Election Cycle Theory that found U.S. stock markets are weakest the year after a new president took office and improved until a new cycle started with the election of the next president? Well, that theory didn’t hold water after markets were stronger the first year after Bush Sr., Clinton, and Obama were in office. While economists are eager to establish a pattern when it comes to U.S. presidential elections and the market, they have yet to land on one that is consistent.
Concern #2 – The political party of the U.S. President will affect the stock market.
Some clients may assume Republican presidents mean better stock market returns, but a look back at the S&P 500 since 1929 shows us that historically, returns are better with Democrat presidents. While this data shouldn’t drive investment decisions, it may work to balance some fears. What’s essential to express is that regardless if a president is a Democrat or Republican, many unforeseen factors can cause the markets to soar or decline.
Concern #3 – The POTUS has direct influence on the U.S. stock market.
Unfortunately, one man or woman alone cannot protect the market against loss, but this also means they cannot directly cause a loss. There have been market corrections or bear markets with every U.S. president since 1929. There is always a risk with investing, but the good news is long-term investors have been rewarded regardless of who was in office.
The best strategy to combat political fears and uneasiness is to take the focus away from politics or investment returns and towards financial planning. You have the opportunity to use financial planning software to run a series of what-if or worst-case scenarios to show what would happen if there was an increase in taxes, health care costs, or declining markets to ensure your clients have invested appropriately for their risk tolerance. Adjust financial plans when necessary and continue to focus on the things your clients’ can control to improve their finances, such as saving more and spending less.
The information in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced in the links provided are historical and is no guarantee of future results.