Financial experts often say that the stock market hates uncertainty — and the 2020 election has been nothing if not uncertain, especially now, as we continue to wait for key battleground states to process ballots. But this doesn’t mean that the stock market is going on a downward spiral, or that the average American will be greatly impacted by it.
“It’s unwise to try and predict if and when the markets will crash at any point in the coming weeks — despite people’s best efforts, market-timing is generally a losing battle,” Dan Egan, managing director of behavioral finance at Betterment, tells Refinery29. “Usually the markets become volatile based on economic uncertainty, or uncertainty with other major happenings in the country – right now, we’re still counting presidential ballots and the markets are performing extremely well today. Similarly, in 2016 when the odds flipped in Trump’s favor, overnight futures plummeted because people expected Clinton to win. However, by the time the markets opened, it was a normal trading day with solid gains. You can never assume anything in either direction.”
Though there were worries about a stock market crash leading up to the election, those anxieties haven’t come to fruition as of now. There was some turbulence during Election Day with stock futures, but currently, with Democratic presidential candidate Joe Biden slightly leading in the electoral college, the major stock indexes are all up — with the Dow soaring by 800 points. President Trump has claimed that there would be a stock market crash if Biden wins, but this is not backed by any evidence.
Egan says that whether Trump or Biden wins the presidential race, “There is unlikely to be a long-term effect.” Historically, there hasn’t really been a partisan divide on how the market reacts to Republican presidents or Democratic presidents. “From 1853-2015, the average annual market return was 10.5% with a Republican in office, and 10.7% with a Democrat,” says Egan. “And history shows us that market volatility is higher pre-election than after, when the results are factored into trading.”
So what does this mean for your personal finances? Essentially, you should sit back and try to relax. “Investors should continue playing the long game and let things play out,” says Egan. “Even if there is a drop, that’s to be expected over the course of your portfolio. And of course, if you’re approaching retirement age, you should already be less invested in stocks as a general rule of thumb.”
If you don’t own stocks but are more generally worried about what a crash could mean, it’s worth noting that the state of the stock market doesn’t necessarily reflect the health of the economy overall. Rising stock prices, for example, indicate Wall Street hopes that certain companies may do well, and that more industries will open up, hire back employees, and resume operations. These hopes have been bolstered by stimulus relief bills and low interest rates, among other factors. But with the U.S. going through the worst COVID surge yet, we can see how such hopes don’t always translate to reality.
The overall strength of the stock market throughout the pandemic is also largely thanks to the tech sector, whose enormous size can obscure how other industries are struggling. Jobs in the tech industry have been less affected by COVID-19, but this of course isn’t the case for industries such as retail or hospitality.
COVID-19 has brought about an especially unequal recession, far more so than the Great Recession; data so far shows that higher-income Americans have pretty much recovered from job loss while lower-income workers are continuing to suffer deeply. It’s a reminder that when we talk about the stock market, we have a remember that it’s wealthy Americans who are most likely to be invested in it — and in particular, invested in the top companies in the Dow, Nasdaq, or S&P 500. Most Americans are not involved in the stock market; what investments they may have are through retirement funds like 401ks, which are intended to be left alone for decades. And even then, census data from 2017 showed that only about 32% of American workers even have a 401k.
If you’re worried about the state of the market because you have a 401k, and you’re not about to retire right now, then the advice is pretty much the same as it was when we saw the market plunging at the start of the pandemic: don’t touch it. Even if we see another plummet, things will most likely bounce back, and you’ll be able to ride this out. More to the point, it’s not something the stock market can accurately predict — so obsessing over every rise or drop won’t exactly be beneficial to you.
“Now, suppose that the uncertainty continues for months, and there’s a contested election that sparks violence. That could make markets skittish,” Egan admits. “Though again, it’s impossible to tell.”