In times of uncertainty, such as the lead-up to an election, politics often dominates the headlines and conversations. During times like these, one common question is what to expect from the market as the election comes around? While an election may influence market sentiment, the primary focus when answering this question should be about policy. Politics generally creates short-term turbulence, but policy has a much longer lasting effect on the market.
To start, let’s look at the difference between politics and policy. Politics consists of the competition and negotiation among each representative or group to influence policy decisions. From my perspective, I view it as the sort of “show” each group or representative puts on to get votes or support from others. Given the current conditions we are in with social media and technology, it is sort of par for the course no matter what side you are on or support. On the other hand, policy refers to the tangible laws, regulations, and guidelines that result from political processes. In essence, policy is the actual change that is going to happen as a result of the politics.
To dive a little deeper into politics, it involves campaigns, lobbying, elections, and any other factors that influences the distribution of power and resources. From a broader perspective, the politics side of the conversation tends to generate short-lived effects on the market as compared to policy. While the election itself might be considered politics, it does tend to influence the market more than others. The main reason is that the future of policy largely depends on which candidate is chosen and what agenda they have.
Let’s start to look at the policy side of the conversation. One policy issue that is pretty top of mind is the sunset of the Tax Cuts and Jobs Act (TCJA) in 2026. While we won’t dive into this in much depth, this act sun setting, or even being extended, would affect the market much more than politics would. The reason I say this is because policy, like the TCJA, has a lasting effect on investor behavior and market conditions as compared to politics. Some other examples of policy that have affected or continue to affect the market is the CARES Act in 2020, the Affordable Care Act, trade policies, tariff impositions, and the Federal Reserve’s decisions around monetary and fiscal policy. When relating these back to the market, these policies affect investor sentiment, corporate profitability, economic growth, and asset valuations. Each of these being key influencing factors for many investors, which goes on to affect the market as a whole.
Now that we have distinguished the two, let’s talk about strategies. Diversification, the idea of not holding all your eggs in one basket, is a great way to start and should always be kept in mind when building a portfolio. It limits the affect any one investment, event, sector, or region could have on your portfolio. Also, take into account how much time your portfolio or account has to recover from a potential drop in the market. If you will need that money in the next few months, maybe this is a good time to take advantage of current high rates in money markets or CDs as compared to investing in the market. Other strategies are to stay informed, focus on the fundamentals and goals you set up for your portfolio, and to seek professional advice.
While the noise of politics may grab headlines and your attention, it’s the substance of policy that investors should keep an eye on as they navigate the markets. Policy decisions, whether stemming from legislative changes or executive actions, has a large and lasting impact on the market. By understanding the difference between politics and policy and their effect on the market, you can better prepare your portfolio to weather any storm that may come. If you have any questions about your portfolio, feel free to reach out to us at [email protected], or call us at 607-936-3785. We are here to help with everything your money touches.
