How the presidential election will affect your investment strategy

Let me know if this sounds familiar: Your Facebook news feed has blown up with messages like "The sky is falling! If my chosen candidate doesn't win, the markets are doomed and so are my investments!"

Elections tend to bring out the more emotional side of our personalities. A presidential election year, especially, can cause excitement or despair, depending on your side of the aisle.

Market returns during an election cycle tend to be lower than years immediately preceding and following an election year. That shouldn't come as a surprise. Humans tend to be guided by our emotions, and the time during an election is when emotions are going to be most tied to election results. What we historically see after the fact, though, is a return to normalcy once emotions have time to settle down. History reminds us that emotional investing is not the safest approach. Successful investing begins with a plan that accounts for goals, time horizons and risk comfort levels.

Rubber masks in the likeness of Republican presidential candidate Donald Trump, left, and Democratic presidential candidate Hillary Clinton
Tomohiro Ohsumi | Getty Images

So what can we expect from the markets during this election cycle?

No matter which side of the political spectrum you fall on, you should rest on the foundation of: "Regardless of who wins, we will plan accordingly and stick to the basics."

The first step in planning accordingly, then, is to determine what the economy is doing right now. We had slow growth coming out of the 2008 crisis, but markets have come back strong. Things are recalibrating, and the markets are looking for growth.

Eight years since the 2008 crisis, our economic situation isn't all good, but it isn't all bad, either. Let's consider the pros and cons.

"If you invest with a long-term, balanced and consistent approach, neither presidential candidate is likely to have a dramatic effect on your investments."

Some pros:

  • Oil prices are low. Oil prices may have climbed back to around $50 a barrel after falling below $27 a barrel in February, but they are still low compared to the prices of 2008, when they climbed above $140 a barrel.
  • Interest rates are low. There was some concern when the Federal Reserve raised interest rates in December, but the yield curve has remained relatively steep.
  • Valuations are not euphoric. In the 21st-century markets, bubbles seem to rise and pop with increasing regularity, but the markets of 2016 have not been characterized by such euphoria. We're not in a situation of Alan Greenspan's "irrational exuberance" theory, where the markets are unfairly overvalued. Market valuations right now are well within long-term averages, especially given the current rate of growth. While it appears that everything is fairly valued, even small troubles can "spook the horse" in an election year with heightened emotions.
  • Inflation is low. Inflation has remained around 1 percent through 2016, which is low.

Some cons:

  • Growth is slow. Fewer jobs have been reported so far this year than expected, and retail sales have been disappointing. The United States' gross domestic product growth in the first quarter of 2016 was also at its lowest in two years, at a rate of 0.5 percent.
  • The first stage of the Fed tightening its rates always comes with heightened volatility. The Fed increased its rates in December. A month later the markets celebrated the new year with a bad start. The first two weeks of January were the worst for the S&P 500 Index in history, as it had a return of -4.96 percent.
  • This particular presidential cycle has produced two of the most widely disliked candidates in history. We've seen that election years historically post lower returns than in the years before and after an election cycle, but this year is unique in that both candidates are viewed so unfavorably. The lack of unity around each presumptive nominee means we may see further emotional instability surrounding the markets during this election cycle.

Once we've evaluated the pros and cons of the economy, we can come up with a plan. It's important to consider that the markets are not just unpredictable in an election year. There are always going to be moments of uncertainty, because we live in an imperfect world. While we can't look into the future, we can look to the past to get a sense of how people have reacted in similar periods of uncertainty.

Despite the pros I mentioned, the market in 2016 looks like it might be one characterized by uncertainty. But that's nothing new, right? Let's look at investment performance in past times of uncertainty when a presidential election was not necessarily impacting investors' mind-sets.

After several European states found themselves drowning in debt they couldn't pay back, the world markets seemed to be on the verge of total collapse. While the crisis is not necessarily over, the markets have continued on, relatively unscathed in the long run (although risk aversion among investors seems to have increased considerably).

The markets dove deep as the United States approached a fiscal cliff in 2013 but recovered pretty quickly after the president and Congress narrowly avoided a government shutdown. In fact, the S&P 500 and the Dow closed 2013 with their best year since the 1990s.

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When most people think of the economic picture of the 1970s, they think of three things: the gas shortage, rising food prices and rapid inflation. The 1970s were a mess — with some of the worst market returns in history in '73 and '74 and the "Death of Equities" in 1979 — but the market still was positive overall for the decade. And don't forget that the following decade had one of the most consistent runs of growth the United States has ever seen.

Low oil prices combined with trouble in China to create a pretty market-phobic start to 2016. The Dow lost 5.5 percent of its value, and the Nasdaq sank 8 percent — one of the worst market year starts in history — yet the market got its act together and turned in a positive first quarter.

Those are a few of the worst periods the stock market has experienced, but many people still seem convinced the markets will collapse based on the results of the 2016 U.S. presidential election.

So it's either Hillary Clinton or Donald Trump. For my prognostications, let's assume Congress remains in Republican control. Here's what we might be able to expect from both candidates.

If Clinton wins, expect something similar to the markets under President Obama — more of the slow grind of policy-making. That's not necessarily a bad thing. Clinton is more of a centrist candidate, and if the GOP retains control of Congress, it's possible she could cooperate with a Republican Congress and balance the budget the way her husband did in the '90s.

In case you didn't realize it by now, Trump as president carries a lot of uncertainties. For example, he's talked about imposing tariffs on foreign goods. But beyond all the rhetoric, this will probably translate to "more of the slow grind of policy-making." However, Trump could wield his "art of the deal" expertise and broker some pretty popular, nonpartisan solutions. We expect many of the same scenarios and arguments, which we'll figure out as they happen.

Here's the key takeaway: If you invest with a long-term, balanced and consistent approach, neither presidential candidate is likely to have a dramatic effect on your investments.

There will be periods of time when your faith can be tested in the system, but as we've seen based on past scenarios, you don't want to let those events determine what you do next. In investing, you need to maintain a long-term, broad focus. A narrow-sighted approach will result in less than optimal results.

— By Bijan Golkar, CEO and senior advisor at FPC Investment Advisory