U.S. equities typically don’t do well in an election year as the political uncertainty helps fuel market volatility. Instead, exchange traded fund investors may be better off sticking to more conservative investment-grade fixed-income assets.
”If a candidate with radically different ideas came into office, it would be an environment where the market would have difficult time assessing what impact that would have on the economy,” Tracie McMillion, head of global asset allocation strategy for Wells Fargo Investment Institute, told InvestmentNews.
Republican candidate Donald Trump and Democratic runner Bernie Sanders both led their respective primaries, revealing investors’ desire to change up the status quo and adding to uncertainty.
McMillion found that domestic large-cap stocks typically experienced “much higher” returns on average when an incumbent is running in a re-election year, but during “open” election years, stock gains only averaged 1.15%.
On top of the open elections this year, markets are weighed down by a number of other negative factors, including concerns over global economic growth, a collapse in oil prices, a multi-year rally that is running out of steam and a Federal Reserve that is contemplating higher interest rates.
Consequently, Wells Fargo argues that people should diversify to help hedge against the volatility, advising investors to use investment-grade bonds to stabilize their portfolios.