How Do Elections Affect the Stock Market? Historical Trends and Insights
July 17, 2024
Every four years, the United States goes through the excitement and anxiety of a presidential election. It’s a time when opinions are strong, debates are fierce, and the future seems uncertain. For many people, the stakes feel incredibly high, and the potential impact on their lives is significant. People care deeply about the election, but it’s often said that markets do not.
During election years, you can hear the concerns of everyday investors. At the local coffee shop, retirees discuss whether their savings will be safe. At the gym, young professionals debate which candidate will best support a thriving economy. At family dinners, conversations about job security and future financial stability come up frequently. It’s clear that the election is on everyone’s mind.
Yet, the stock market has its own rhythm, largely indifferent to the political drama. Historical data shows that while elections can cause short-term volatility, the overall impact on long-term market performance is often less dramatic than many fear. Investors might worry about who will sit in the Oval Office, but the market tends to focus more on broader economic indicators and long-term trends.
As an independent fiduciary financial advisor, we aim to provide clear insights into how presidential elections, along with the composition of Congress, impact the stock market. By analyzing historical data, we can understand the trends and make more informed decisions.
How Do Elections Affect the Stock Market?
Pre-Election Market Performance
The stock market often experiences increased volatility in the year leading up to a presidential election as investors are uncertain about potential policy changes, causing fluctuations as they try to anticipate the election’s outcome. Historically, the market has shown mixed results in pre-election years, with some cycles performing strongly and others facing downturns. For instance, in the year before the 2016 election, the S&P 500 experienced moderate gains despite significant political uncertainty.
Market Behavior During Election Years
Election years themselves can be characterized by uncertainty and speculation. Investors closely monitor candidates’ policy proposals, which can lead to market swings. Despite this volatility, the stock market has generally performed well in election years. According to historical data, the market has posted gains in most election years, reflecting optimism or adjustment to anticipated changes. For example, in 2020, despite the global pandemic and political tension, the market ended the year on a high note with the S&P 500 up 18.4%.
Source: Morningstar/Ibbotson Associates. Past performance is no guarantee of future results. For illustrative purposes only and not indicative of any actual investment. The S&P 500 Index is an unmanaged index of 500 companies used to measure large-cap U.S. stock market performance. Investors cannot invest directly in an index. Index returns do not reflect any fees, expenses, or sales charges. These returns were the result of certain market factors and events which may not be repeated in the future.
Historical Election Year Performance
From a positive trends perspective, the S&P 500 has often ended election years on a positive note, driven by investor confidence in the economic outlook regardless of the winning party. From 1928 to 2019, the S&P 500 has averaged an annual return of 11.3% in election years.
Source: Morningstar as of 12/31/23. Stock market represented by the S&P 500 Index from 1/1/70 to 12/31/23 and IA SBBI U.S. large cap stocks index from 1/1/26 to 1/1/70. Past performance does not guarantee or indicate future results. Index performance is for illustrative purposes only. You cannot invest directly in the index.
Conversely, some election years have also seen declines, particularly when elections coincide with economic recessions or other significant disruptions. For instance, during the 2008 financial crisis, the market fell significantly despite it being an election year.
First Year After Elections
The first year after a presidential election often sees continued volatility. Markets react to the new administration’s initial policy moves and legislative priorities. This period can be marked by significant shifts as investors reassess their strategies in light of the new political environment. For example, in 2017, the first year of Donald Trump’s presidency, the S&P 500 gained approximately 22%, buoyed by expectations of tax cuts and deregulation (Source: Morningstar).
Long-Term Market Trends: Republican vs. Democratic Presidents
Over the long term, the stock market’s performance is less tied to the party in power and more to broader economic trends and fundamentals. While elections can cause short-term disruptions, long-term market growth tends to align more closely with economic growth, corporate earnings, and other macroeconomic factors.
- Republican Presidents: Historically, markets have performed well under Republican presidents, who are often seen as more business-friendly due to policies favoring tax cuts and deregulation. For instance, during Ronald Reagan’s presidency, the market saw significant growth with an average annual return of 14.2%.
- Democratic Presidents: Conversely, markets have also shown strong performance under Democratic presidents, who may implement policies that boost consumer spending and social programs. Under Bill Clinton, the market experienced a robust period with the S&P 500 averaging an annual return of 15.2%.
At the end of the day, what we have seen historically is that it is time “in the market,” not “timing the market,” that matters, not the president’s political party. Below is a helpful chart that illustrates the return of a $10,000 investment over the last 10 years. What you will see is that the “bipartisan” portfolio, remaining invested the entire time, heavily outperformed being invested only during a Democratic or Republican presidency.
Source: Morningstar as of 12/31/23.
Market Performance Based on Congressional Control
The makeup of Congress—whether it’s controlled by Democrats, Republicans, or is split—also plays a crucial role in shaping market outcomes. The ability of the president to pass legislation is significantly influenced by the Congressional majority.
- Unified Government: When the same party controls the presidency and both houses of Congress, it’s often easier to pass significant legislation. This can lead to more predictable market conditions.
- Divided Government: When the presidency and Congress are controlled by different parties, legislative gridlock can occur. While this can lead to uncertainty, markets sometimes favor the status quo and predictability. Historically, a divided government has often coincided with positive market performance, as it can lead to a balance of power that prevents extreme policy shifts.
Investment Strategies During Election Cycles
Given the historical trends, investors might consider several strategies to navigate election cycles effectively:
- Stay Diversified: Diversification is one of the golden rules of investing, and it’s especially important during election years. By spreading investments across various asset classes—such as stocks, bonds, and alternatives—you can reduce your exposure to the risks associated with political uncertainty. For example, if one sector experiences a downturn due to an election outcome, other investments may remain stable or even gain value such as the use of alternative investments, balancing out your portfolio’s overall performance.
- Focus on Fundamentals: It’s easy to get caught up in the daily headlines and political drama, but savvy investors know the importance of looking beyond short-term events. Instead of reacting to every twist and turn in the election cycle, focus on the economic fundamentals. Companies with strong balance sheets, consistent earnings, and competitive advantages are likely to perform well over the long term, regardless of who wins the election. Remember, the market’s long-term growth is driven more by these economic fundamentals than by political changes.
- Monitor Policy Proposals: While it’s wise to focus on long-term fundamentals, it’s also beneficial to stay informed about policy proposals from the candidates. Understanding the potential impact of proposed tax changes, regulatory shifts, and spending plans can help you anticipate market movements and identify new opportunities. For instance, if a candidate proposes significant infrastructure spending, sectors related to construction and materials might see growth. By keeping an eye on these proposals, you can make more informed decisions about where to allocate your investments.
So, What are the Key Takeaways for Election Year Investment Strategies?
By employing these strategies, you can better navigate the uncertainties of election cycles and maintain a robust, resilient investment portfolio. Remember, the goal is to build a strategy that aligns with your long-term financial objectives while being flexible enough to adapt to changing political and economic landscapes.
Understanding the historical performance and volatility of the stock market before, during, and after presidential elections can help investors navigate these periods of uncertainty. A diversified approach focused on long-term fundamentals often proves beneficial.
For personalized advice tailored to your financial situation and goals, consider consulting an experienced Certified Financial Planner™ professional at Williams Asset Management. As fiduciaries, we can help you create a resilient investment strategy tailored to your individual situation.
Brian McKinney, CFP®, is a Financial Advisor with Williams Asset Management. Williams Asset Management is located at 8850 Columbia 100 Parkway, Suite 204, Columbia, MD 21045. He offers advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, a Registered Investment Adviser. Fixed insurance products and services offered by Williams Asset Management. Williams Asset Management does not offer legal or tax advice. You should consult a legal or tax professional regarding your individual situation. For additional information about the services of Williams Asset Management, please call (410) 740-0220 or email at Info@WilliamsAsset.com. © Williams Asset Management. For more information about Williams Asset Management, please visit www.WilliamsAssetManagement.com.
