Bottom Line: No Matter Who Wins Elections, The Stock Market Always Ultimately Responds To Fundamentals
During election season the media loves trotting out headlines about the “best stock to buy if X or Y wins”. And similarly, you might see lots of sensationalistic pronouncements about how if the Democrats or Republicans win then the economy and stocks will tank. But remember that ultimately stock prices are based on the fundamentals, meaning earnings, cash flow, and dividends.
Companies have management teams whose job it is to adapt and overcome any challenges that might come from major policy shifts in Washington. In fact, despite what the DC beltway may think, Washington’s role in the economy is far smaller and less important than most politicos think. That’s why the market has risen in 74% of years, no matter which party was in charge of the White House and Congress.
And as for this year’s midterms? Well while it’s almost certain that the GOP will lose the House, remember that Gridlock is usually how these elections turn out. And as 18 consecutive post-midterm rallies have shown, it ultimately matters little to stocks what party does or doesn’t win.
The best thing investors can do is remember that their portfolios are a business (holding company of other companies). That means your capital allocation (investing) decisions should always be made with a clear mind and with an eye on meeting your long-term goals; independent of politics. The US and the global economy are far more complicated than most political pundits can fathom and thus the outcome of any election is usually NOT going to result in the kind of stock market moves they often expect.