How A Presidential Election Affects the Stock Market

During every major election period, there is always talk about the impact that the person winning the White House will have on the stock market. As Americans prepare to elect a president in the coming week, many investors attempt to figure out what the outcome will mean for your portfolio. However, it’s not just as simple as which party wins.  

A look back at history shows that presidential election cycles do correlate with stock market returns, but there are a few things to consider in election years. Bear markets, recessions and wars tend to start in the first two years of a president’s term, says The Stock Trader’s Almanac; bull markets and prosperous times mark the latter half. But over the past century, the stock market has mostly run briskly across most of the presidential cycle before losing momentum during election years.

Democrat or Republican?

Even though you might feel strongly about one party or the other when it comes to your politics, when it relates to your portfolio, it doesn’t matter much which party wins the White House.

According to Bespoke Research, the Dow Jones Industrial Average has gained 4.8% annually since 1900. There are many who would suggest that Republicans, who are supposedly more business-friendly than the Democrats, would be more beneficial for your stock holdings, but that’s not entirely the case. In actuality, the average Republican administration saw gains of 3.5% per year, while the Democrats saw gains of almost twice as much, at 6.7% per year.

Divided vs. United Government:

Another myth is that markets do better when the government is divided. This theory derives from the idea that divided power saves both parties from their worst instincts. With neither party in control, government is somewhat neutral, leaving markets free to flourish. However, this hasn’t always been the case either.  

Y Charts has looked at stock returns going back to 1930 under three separate scenarios. When one party controls the White House and both houses of Congress, the Dow averages 10.7% annual returns. When there’s a split Congress, stocks average 9.1% returns. But when the president is in the party opposite of both the House and Senate, stocks deliver a mere 7% average annual return. Consider this breakdown of scenario by party, using S&P 500 data from RBC CapitalMarkets data going back to 1933:

It is important to remember that all of this information is looking at the performance of the broader stock market. Presidential elections can and will continue to have more specific consequences for the market, depending on each party’s agenda and how much of Washington they control.

Predicting the Future:

It turns out that the stock market has a remarkable ability to predict who will likely win the White House. If the stock market is up in the three months leading up to the election, the incumbent party is more often the winner. Losses over those three months tend to elect the opposing party.

With the final stretch of the election upon us, it’s still nearly impossible to guess how the stock market will react to next week’s vote. Our firm recommends that no one should make investment decisions based on the outcome of an election. Regardless of who wins the election, expect a continued economic rebound that will support future equity gains. In similarly polarizing elections in 2008 and 2016, investors who maintained their stock allocations were rewarded with future gains, so it’s best to avoid making any major moves with your portfolio over the next few months. If you have any questions relating to the stock market and your financial goals, please contact us and we would be happy to help you set up your portfolio respectively. 

 

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