How presidential elections affect the stock market

While presidential elections can cause tension, it should be noted that markets typically do not react much to the event.

What history tells us.

In the year leading up to the election, both stock and bond markets had a more muted performance than in other years. Since 1948, the S&P 500 increased 10.72% in the calendar year of the presidential election, but it increased even more, 11.6%, in the calendar year after the election. Markets are relatively muted in the lead-up as market participants typically hold off on major moves until the dust settles from the elections. Investors start to make moves once it is known who the president will be and what their priorities are. Simply put, markets and investors do not like uncertainty.

Also, the economy (Gross Domestic Product) has continued to march higher through all 46 presidential administrations. Yes, certain sectors of the economy and markets (health care and energy, for example) can be impacted by various legislation and executive orders, but overall, other factors impact markets more than elections (inflation, labor, and geopolitical turmoil, for example). Furthermore, it often takes months or even years for major legislation to pass Congress and be signed into law by a president. 

“The old adage applies: Time in the market is more valuable, and feasible, than timing the market,” said Matt Finn, Chief Economist for 1834, a division of Old National Bank. “Beware of letting emotions guide your investment decision making. Most game-changing developments in energy, healthcare, or technology take years to develop and are independent of the political landscape.”

While the presidential election gets a lot of attention, midterm elections are also important because they help determine power in Congress and they provide voters with the opportunity to change the party in power. Depending on how the vote plays out, Congress can provide support for the bills and legislations proposed by the president, or act as a counterbalance. 

Regarding bond returns, Federal Reserve policy is the primary driver and not elections. Typical drivers (inflation) influence Fed policy. Interestingly, the Bloomberg Barclays U.S. Aggregate Index has posted a positive total return every presidential election year since 1980. However, it seems difficult to place any weight on that data point since the index has posted a positive return 37 out of 41 years from 1980 to 2020. As for credit spreads, they tend to either narrow or largely remain stable in the immediate year following an election. In general, investors appear to somewhat shy away from corporate bonds until after election results come in when, again, the uncertainty is removed.

Blue, red, or split.

Perhaps surprisingly, markets perform best when republicans and democrats each control a part the Federal Government. That scenario typically leads to a balance of power, which the markets see as less worrisome due to policy gridlock. When either party sweeps the executive and legislative branch, short-term volatility often happens since some policy changes are easier to pass.

Presidential elections create lots of headlines (and headaches), but it should not sway your financial plan. The markets are always weighing whether the political platform is helping money to flow into capital markets or hindering it. Regardless of administration, congressional policy, or tax codes, entrepreneurs and quality companies have found ways to innovate, grow revenue over time, and make profits. Our view on investing, as always, is to stay disciplined and focus on the long term.

Sources: Crandall, Pierce & Co, Forbes, Barron’s, Standard & Poor’s, Credit Sites, Barclays.