The Biggest Election Risk: Tunnel Vision

Election season often follows a familiar script. Investors debate congressional control, speculate on policy outcomes and search for clues about what markets might do next.

But the greater investment risk is not election-driven volatility. It is allowing a single political narrative to dominate decision-making. When investors become overly focused on one event, they risk overlooking the many other forces shaping market outcomes.

As the U.S. midterm elections approach in November, we expect disciplined positioning around fundamentals, diversification and long-term objectives to matter more than predicting political outcomes. Elections can influence policy direction, but markets are shaped by a much broader set of economic and financial forces that extend well beyond election night.

Market Outcomes Resist Election Results

History offers a useful reminder: Market outcomes have never followed a simple political formula. Market and economic performance have varied significantly under both parties, making it difficult to argue that one political environment consistently produces superior investment results.

Instead, returns have been driven by a combination of economic growth, inflation, monetary policy, innovation and investor expectations (Exhibit 1). Politics matter, but markets process far more information than election results alone.

EXHIBIT 1: MARKETS FOLLOW MORE THAN POLITICS
Markets have performed well under a variety of political outcomes.

The Events Nobody Saw Coming

If the political outcomes are only one input, Exhibit 2 highlights a second lesson: some of the most consequential market developments during midterm years often had little to do with elections themselves.

Economic shocks, financial crises, geopolitical events and other unexpected developments often exert a far greater influence on market returns than the issues dominating campaign coverage.

That is the danger of narrative concentration. The more investors focus on the most visible risk, the greater the chance they overlook the risks and opportunities that ultimately matter most.

EXHIBIT 2: MARKET DRIVERS BEYOND POLITICS
Markets are rarely driven by the event everyone is watching. They are often driven by the development that nobody expected.

Looking Beyond Election Night

Taken together, the historical record points to a consistent conclusion: Election outcomes can influence policy, but they do not always determine the path of corporate profits, innovation or economic resilience.

Yet election coverage often creates the impression that a few government policies will dictate the market's future. That mindset can be costly because it encourages investors to evaluate portfolios through a political lens rather than an economic one. It rewards prediction over discipline and headlines over analysis.

The result is an investment process that overestimates one source of uncertainty while underestimating many others.

The Cost of Acting on Headlines

This tendency can show up in portfolio decisions. When investors become captivated by a single narrative, they are more likely to make event-driven shifts before and after elections.

They reduce risk ahead of an uncertain outcome, increase risk after the results are known, or reposition portfolios around a specific political scenario. The challenge is that markets rarely wait for certainty.

Missing even a small number of the market's strongest days (Exhibit 3) can materially affect long-term outcomes. For investors, that reinforces that headlines can be influential, but fundamentals have historically been far more important drivers of long-term returns.

EXHIBIT 3: THE PENALTY OF WAITING FOR CERTAINTY
Missing even a handful of the market’s strongest days can materially erode long-term returns, reinforcing the risk of stepping aside when headlines feel most uncertain.

Playbook: Position for What Matters Long-Term

The challenge is not predicting the election. It’s ensuring portfolios remain positioned for the market forces that will matter long after the votes are counted.

Position for fundamentals. Focus on the areas of the market supported by resilient economic activity, corporate earnings momentum and long-term growth drivers rather than a specific political outcome.
Maintain diversification across scenarios. Build portfolios that can navigate a range of policy, economic and market environments instead of relying on a single election thesis.
Avoid concentrated political bets. Markets are influenced by many variables, and election outcomes alone rarely provide a reliable roadmap for investment positioning.
Stay focused on long-term objectives. Prioritize strategic asset allocation, risk management and compounding over attempts to trade political headlines.

Glossary and Index Definitions

¹S&P 500 Index: The index, a gauge of the large-cap U.S. equity market, includes 500 companies that represent approximately 80% of the market capitalization of publicly traded U.S. equities.

²YIELD: Yield is annualized interest (coupon) payments divided by the bond market price, expressed as a percentage.

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