Pennsylvania Trust

Does the Election Matter to the Markets?

Does the Election Matter to the Markets?

Photo of Tara Hedlund

The 2016 U.S. presidential election represents one of the two remaining volatility events for this year. The other is a possible Federal Reserve interest rate increase in December. While the financial markets endure a U.S. presidential election every four years, given the increased political polarization, this year does seem to have the potential for greater near-term market volatility. There are three potential election outcomes that may impact the financial markets.

Three Scenarios

The first is the most likely scenario based on current polling data—a Democrat in the White House and at least one part of Congress controlled by Republicans. With continuing divided government, we would expect little overall market impact other than perhaps a short-term relief rally.

In the second scenario of one party dominating both the White House and Congress, we would expect an initial negative market reaction. Sectors that may be more highly impacted would include financial services, healthcare, and energy.

Finally, the last scenario (which is the least likely based on current polling data) would be a Republican in the White House with a divided Congress. We would expect a short-term negative market reaction given the uncertainty introduced by the lack of policy history of the Republican candidate.

Markets Will Adjust

At Pennsylvania Trust, we believe that well-diversified portfolios create long-term investment value irrespective of who controls Congress or the White House. With respect to individual stocks, we invest in high-quality companies with positive cash flow generation, strong balance sheets, and management teams committed to shareholder value. Post November 8th, the financial markets will adjust to the new political landscape, and the focus will return to the economy and corporate profits while waiting for the Federal Reserve to make its rate decision in December.

by Tara R. Hedlund, CFA, CPA
Ms. Hedlund is Senior Vice President at Pennsylvania Trust.

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