This year's election cycle has certainly been contentious. Both leading candidates have die-hard supporters as well as high un-favorability ratings, which is causing a tremendously high level of anxiety among many investors who fear apocalyptic scenarios if the "other" candidate wins.
Although such feverish emotions are understandable, it is critical that investors don't let their feelings cause them to make rash or foolish investment decisions. I assure you, no matter what the outcome on Nov. 6, the earth will keep rotating on its axis, the sun will still rise in the East and the U.S. economy will continue to function. However, given the polarized environment, abnormal market volatility is plausible and with this comes a potential opportunity.
First the facts: Historically, since 1960, the U.S. stock market has had a positive return during presidential election years 82% of the time -- a pretty good track record if you ask me. Second, markets prefer a split bill. In other words, they like it when one party controls the White House and the other controls Congress. Alternatively, a split Congress, in which one party controls the Senate and the other the House of Representatives, has also been received favorably by markets in past years. In other words, markets and investors favor a balance of power and an environment where one side cannot dominate the agenda.
As November and election day approach, and polls likely continue to reflect a close race, expect rhetoric to sharpen, with each side saying the other will be bad for the economy. And although the headlines will be spectacular and at times frightening, what investors should focus on is economic data, both domestic and global. Given the current slow-growth, low-interest rate environment and economic uncertainty around the world, slight improvements or deterioration in U.S. data can have a profound effect. After all, the combination of a weak May jobs report and the mere possibility of Brexit caused the Federal Reserve to push off its June interest rate hike and warn that the timing of future hikes is uncertain. As money managers, we will remain focused on manufacturing data, housing prices, monetary policy outlook and, of course, corporate earnings.
The second-quarter earnings season kicks off in early July and will be a key driver of market returns in the third quarter. Historically, July and August have been challenging months for stock investors, and they could very easily be that way this summer. There are things investors can do now, however, to dampen the summer doldrums' and reduce the expected impact of this year's election-cycle volatility. Over time, dividends have accounted for nearly half of the S&P 500's total return. The compounding of dividends has a profound long-term impact on your investment. And in the short term, the payment of the dividend provides a relative safe haven from downside volatility, especially when investors focus on companies that have a track record of raising their dividends. But be careful, in this tepid environment, making sure that the company's balance sheet and income statement are solid is critical, or you might find yourself in trouble.