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How do elections usually affect the stock market?

Man wearing face mask at New York Stock Exchange, holding tablet

While it’s impossible to predict exactly what will happen next in the financial markets, experts see a few common trends with elections.

"S&P 500 volatility has typically been higher in election years than in nonelection years, as markets frequently reprice the probability of the future administration’s policies," the JPMorgan Market Insights team wrote earlier this year.

As for the outcome, markets tend to react more positively in the immediate aftermath of a Republican win, because the party’s policies are considered more market friendly.

“This is by no means a strong rule of thumb… Other significant geopolitical and economic events may carry more influence over the market’s direction," the JPMorgan team added.

In general, a change in control at the White House has more impact than which party ultimately wins the election. Analysts from U.S. Bank found that stock market gains averaged 6.5% when a president was re-elected or if one party kept control of the White House. Gains averaged just 5% when a new party came into power.

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What does Joe Biden's victory mean for the market?

Joe Biden at presidential debate talking into microphone holding his face mask in his hand

"President-elect Joe Biden will deliver a boost to global stock markets and the U.S. and world economy," says Nigel Green, chief executive of the financial advisory firm deVere Group.

Green says markets will like the "renewed certainty and stability" that he says a Biden White House will bring. And he says it's better for investors if the government remains divided, with the U.S. Senate staying in Republican control, because that would lessen the risk of regulation or higher taxes.

Four Senate races still have not been called, including two in Georgia that will go to runoffs in January.

But even a "blue wave" — with Democrats taking the White House and both houses of Congress — was likely to produce just a neutral market reaction, JPMorgan suggested. Biden’s plan to increase spending in areas including infrastructure and health care would have partially counterbalanced the negative effects of any corporate tax increase.

Still, under a Biden presidency experts at Fidelity Investments expect to see greater regulation that will hinder a number of sectors, including health care, financial services and big tech.

But a potential warming of U.S.-China relations could positively impact stocks. A Biden White House could mean less reliance on tariffs as a negotiation tool and could result in trade growth, according to the analysts.

How should you prepare?

Businessman using smartphone and holding paper cup ina urban scene. Worried businessman walking on the road and messaging with phone.
Rido / Shutterstock

Given the ongoing pandemic and the especially polarizing nature of this election, it's possible the markets will stay volatile, says Dirk Hofschire, Fidelity Investments' senior vice president of asset allocation.

"A messy or prolonged aftermath could extend that volatility into December and maybe even January," he adds. President Donald Trump hasn't conceded and is pressing ahead with legal challenges against the vote results.

If you’re unsure how to manage your investments in an unstable market, now would be a good time to consider using a robo-advisor. The sophisticated software will automatically adjust to any dramatic changes in the next few months.

On the other hand, if you’re just looking to build wealth for retirement, there’s no need to panic over volatility in an election year, says Tom Hainlin, national investment strategist at U.S. Bank.

“With presidential elections, you need to make sure to have all the components of a diversified portfolio in place, and then stick to a longer-term strategy that’s designed for more than one election cycle,” Hainlin says.

A robo-advisor will build a balanced portfolio for you — but if you’re going it alone, another option is to use a popular investing app. You’ll be able to make all the necessary trades without paying a dime in commission, and you can even buy fractions of expensive tech stocks to finesse your portfolio.

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The content provided on Moneywise is information to help users become financially literate. It is neither tax nor legal advice, is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. Tax, investment and all other decisions should be made, as appropriate, only with guidance from a qualified professional. We make no representation or warranty of any kind, either express or implied, with respect to the data provided, the timeliness thereof, the results to be obtained by the use thereof or any other matter.