If the past few weeks are any indication of the political drama ahead, we could witness the most contentious presidential election in our nation’s history. And while there may be the temptation to move to Canada if your team loses, there’s a mound of data to suggest that may be unwise.
Aside from the bad weather, the table below from First Trust Advisors shows how the stock market has performed during presidential election years since 1928.
Digging deeper, there have been 24 elections since the S&P 500 began. Twenty of these years, the index ended up (83% of the time). When a Democrat was in office and elected (or reelected), the total return for the year averaged 15.0%. When a Republican was elected, the total return for the year averaged 12.9%.
However, those data tell us nothing about what happens after the winner moves into the White House. The chart below shows that investing only when a Republican was in office grew a $10,000 investment in 1961 to more than $102,000 by 2023. Invest only when a Democrat is in office, and that same investment grew to more than $500,000. But staying invested no matter who was in office soared to more than $5.1 million1.
Beating a dead horse even harder, the two charts below show that (1) stocks tend to gain regardless of which party is in the White House, and (2) every president experienced a drawdown at some point during their administration2,3. It’s as if election years are no different than non-election years.
That being said, mentally prepare for volatility around the election. The chart below shows that it’s normal and to be expected4.
But it’s not as easy as selling before November and buying back in the New Year. Volatility measures downs and ups, so the market is just as likely to spike as it is to crash. It would be a shame to miss out on quick gains, especially since the data above overwhelmingly suggests that the stock market will forget who won the White House shortly after November 5th.
What about Congress?
The chart below shows that the stock market has done fine under both party’s control over Congress. However, it shines brightest during gridlock because the economy can grow with less political interference.
Divided governments diminish presidential powers because passing policy becomes harder. Anything too radical from either side tends to get shot down, so less gets done. Fewer things happening in D.C. fuels less uncertainty about the future, which is a tailwind for markets because investors hate uncertainty. Even if existing policies are less favorable, when the rules aren’t changing, investors know what to expect.
Recent history is a testament to this notion. The Democrats controlled Congress when Obama was elected, but two years later, the Republicans won the House and, four years later, the Senate. No major legislation was passed during those six years, and the S&P 500 returned over 105%5.
The same situation happened to President Trump. He got two years of a Republican Congress before losing the House to the Democrats in 2018. After that, no major legislation was passed (except the bipartisan CARES Act in 2020 due to the lockdowns), and the S&P 500 continued to rip higher.
The bottom line is that politicians set the rules. They are the referees on the field, but they aren’t scoring goals or driving the tally higher. Consumers and businesses do that and will be fine no matter who wins the White House.
Sources
1 https://www.schwab.com/learn/story/emotional-rescue-markets-fed-policy-and-elections
2 https://resources.carsongroup.com/hubfs/CG_MidYearOutlook_Whitepape.pdf
3 https://www.capitalgroup.com/advisor/insights/articles/3-investor-mistakes-election-year.html
4 https://www.reuters.com/markets/us/us-elections-toss-twist-markets-fixated-fed-economy-2024-01-12/
5 Bloomberg
Disclosures
This material has been prepared for informational purposes only and should not be construed as a solicitation to effect, or attempt to effect, either transactions in securities or the rendering of personalized investment advice. This material is not intended to provide, and should not be relied on for tax, legal, investment, accounting, or other financial advice. You should consult your own tax, legal, financial, and accounting advisors before engaging in any transaction. Asset allocation and diversification do not guarantee a profit or protect against a loss. All references to potential future developments or outcomes are strictly the views and opinions of Richard W. Paul & Associates and in no way promise, guarantee, or seek to predict with any certainty what may or may not occur in various economies and investment markets. Past performance is not necessarily indicative of future performance.