August 27, 2020
Elections & Wall Street
Elections & Wall Street

How presidential elections impact the stock market

As we come into the final stretch of the 2020 election period, there’s one question that seems to be on the mind of every investor: How will the election impact my portfolio?

It’s a simple question with no simple answer. That said, history does offer some rather surprising insights. While it’s certainly true that “past performance does not guarantee future results,” when it comes to the impact of a presidential election on the stock market, the trends of the past are surprisingly consistent. And though it’s unlikely you’ll make your own choice for the next president based on the winner’s potential impact on Wall Street, it can be helpful to understand what may lie ahead—even if only to mentally prepare yourself for the possibilities. 

According to the Schwab Center for Financial Research, since 1929, the total return of the S&P 500 has averaged 57.4% under Democratic presidential administrations, versus just 16.6% under Republicans. That said, whether a Democrat or a Republican takes office might mean less to investors than the general trends that occur following each election period—regardless of the winner. Since 1928, the S&P 500 Index closed out 17 of the past 23 presidential election years in positive territory. That means that over the past 92 years, the market rose 74% of the time following a presidential election and delivered an average annual return of 7.1%. That is true despite periods of war, recession, depression, and tragedy. While returns in the two years following the election were slightly less impressive (5.8% and 4.5%, respectively), historical data shows that the third year in the presidential cycle is often the most impressive, closing the year in positive territory 82% of the time and averaging an annual return of 13.7%.

No matter how promising those numbers may be, they also tell us that not every presidential election period has delivered a silver lining to investors. However, for every one of the six election years that ended in a down market, the reason for the drop was pretty straightforward:

  • When Roosevelt defeated Hoover in 1932, the US was neck-deep in the Great Depression. The market closed the year down -8.3%.
  • When Roosevelt won his third term in 1940 (the 22nd Amendment limiting presidents to two terms was not ratified until 1951), Hitler was rising in power and the US was on the brink of war. The market closed the year down -9.8%.
  • In 2000, the year George W. Bush defeated Al Gore, the tech bubble burst, bringing the market down -9.1% for the year.
  • And in 2008, Barack Obama defeated John McCain just two months after the bankruptcy of Lehman Brothers, marking the official beginning of the global financial crisis. As you may remember all too well, the market that year closed down a whopping -37%.

Clearly, in each of these cases it was the market environment—not the presidential election—that precipitated a market slide. So rather than the election itself, it seems that what matters most for investors is not who wins or loses, or even trends in the election cycle, but the broader economic and global trends. Of course, that fact begs the next question: What is the market environment heading into this election—and how does it bode for the months and years ahead?

Here, too, there is no simple answer. In general, stock returns are influenced by factors such as business cycles, corporate profits, interest rates, and the US and global economies. But every one of these factors is being impacted by the pandemic. With economies around the globe being forced to shut down in whole or in part, the impact on business cycles, supply chains, corporate profits, and the global economy has been nothing short of devastating.

But that doesn’t even begin to tell the whole story of 2020. Though certain industries have been hit hard by social-distancing mandates (think food and drink services, entertainment, and transportation), the tech sector is flying higher than ever, with Apple a major standout. The result: Nasdaq and the S&P 500 have spent much of the month of August setting new records. It’s certainly not something many investors expected to see happen just a few months ago when the financial headlines were shouting dire warnings about an inevitable market crash. At the moment, the stock market seems almost immune to typical indicators. In a recent Reuters poll of economists, most experts said they don’t expect Britain’s economy to recover from the recent downturn for at least two years. And though Morningstar has projected a “much quicker (and more complete) recovery than the one after the Great Recession” for the US, [1] lacking a crystal ball, the near-term future of the economy and the stock market is about as clear as mud.

What’s the takeaway? In short, this year’s presidential election may prove to be a non-event from a market perspective. What is much more likely to impact your investments as we look to 2021 and beyond is the availability of a COVID-19 vaccine and how quickly the global economy is able to recover from the blow of the pandemic.

So what’s an investor to do as we head into the final stretch of election season? Happily, for this question there is a simple answer: continue to invest according to your current strategy. Picking apart historical trends may be a rather fascinating history lesson (at least for a market geek like me), but basing your investment decisions on those trends is nothing more than an attempt to time the market—an approach that rarely delivers the results of investors’ dreams. Over the years, we have seen time and time again that the more effective path to growth is to apply the power of conservative, active management based on proven economic principles. That means that no matter who wins the election on November 3, the wisest thing you can do to achieve your financial goals is to trust your diversified portfolio and stick to your plan. And if you have any questions about your portfolio and how we’re working to help grow your wealth in the constantly changing market environment, please reach out. We’re always just a phone call away!

[1]How Fast Can the U.S. Economy Recover From COVID-19?, Morningstar, June 20, 2020

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