Election Countdown: Historical Insights for Today’s Investors

It’s the final stretch of the 2024 presidential election campaign. With Election Day fast approaching on Tuesday, November 5, it is natural to wonder what the results will mean for your future, particularly through a financial lens. Heightened rhetoric and policy promises from candidates often lead investors to question their strategies.

Should you consider changing course or maintain your current approach? Of course, the stock market is influenced by countless factors, many of which cannot be predicted. Still it begs the question, how have U.S. presidential elections impacted the stock market in the past? Understanding this historical context can provide valuable perspective as we navigate the uncertainty that often accompanies election season.

So, What Does History Tell Us?

In previous presidential elections, there was talk, particularly on the internet, that the results could pull the stock market into a tailspin. A deeper dive into the data, however, shows that those worries were unfounded. Looking back at the past two elections, no matter which party got elected, the stock market went up after the election:

• The S&P 500 rose almost 24% in the year after President Donald Trump was elected in 2016.
• After President Joe Biden was elected in 2020, the market returned more than 40% the following year. [i]

Further, an extensive analysis by Vanguard, including data going all the way back to 1860, suggests that “markets tend to ignore the results of presidential elections.” [ii]

If fact, market performance appears to correlate more reliably with economic indicators and inflation patterns than with the results of elections, based on historical analysis. [iii]

What About Midterm Elections?

While not directly relevant to the current situation, it’s worth noting the impact of midterm elections as well. What can history teach us about midterms?

The news is equally good for investors nervous about what politics can do to their portfolios. Research from LPL Financial found that stocks have consistently delivered positive returns since World War II in the year after a midterm election. [iv] Remarkably, along with the length of this record — this pattern holds true regardless of which party comes out on top.

Is Political Gridlock the Investor’s Best Friend?

One fascinating takeaway from another study: the stock market appears to favor a political stalemate, particularly with a Democrat at the presidential helm.

Research by investment bank Jeffries analyzed market performance since 1989. Among the findings:

• When a Democrat was President and Republicans controlled at least one chamber of Congress, the S&P 500 averaged a massive 33.9% return.
• During times without political gridlock, the average return was much less, around 22.5%. [v]

In many cases, gridlock moderates the excesses of any one side, increasing investor confidence. This phenomenon may be attributed to the market's general preference for policy stability and predictability, as gridlock often results in fewer sweeping legislative changes that could drastically disrupt business environments or economic conditions.

Maintaining Perspective Amid Political Noise

While election season can stir strong emotions, it's crucial to maintain perspective when it comes to your investment strategy. Despite what we might see or hear in the media, historical data suggests that no single political figure or party consistently determines market performance. In fact, periods of political gridlock have sometimes corresponded with robust market returns.

Rather than making reactive investment decisions based on anticipated election outcomes or actual election outcomes, focus on time-tested principles of wealth management. These tenets include maintaining a diversified portfolio, global exposure, keeping costs in check, and aligning your investment approach with your long-term goals.

As we approach Election Day, remember that markets have historically demonstrated resilience across various political landscapes. If you find yourself concerned about the potential impact of the election on your financial future, consider reaching out to your financial advisor. A brief conversation with us can often provide valuable context and reassurance, helping you maneuver through this stretch with confidence in your financial strategy.

References: 
[i] https://www.forbes.com/sites/bill_stone/2022/10/02/midterm-elections-the-politics-of-the-stock-market/?sh=7d97de0071cc
[ii] https://investor.vanguard.com/investor-resources-education/article/presidential-elections-matter-but-not-so-much-when-it-comes-to-your-investments
[iii] https://www.usbank.com/investing/financial-perspectives/market-news/how-presidential-elections-affect-the-stock-market.html
[iv] https://www.cnbc.com/2019/03/16/stocks-have-rallied-after-every-midterm-election-since-world-war-ii.html
[v] https://www.financialsamurai.com/average-stock-market-returns-political-gridlock/