facebook twitter instagram linkedin google youtube vimeo tumblr yelp rss email podcast phone blog search brokercheck brokercheck Play Pause
Political Elections and Market Results Thumbnail

Political Elections and Market Results

Investors often wonder whether the market will rise or fall based on who is elected president. 

While the outcomes of the elections are uncertain, one thing we can count on is that plenty of opinions and prognostications will be floated in the days to come.

In financial circles, this will almost assuredly include any potential for perceived impact on markets.  But beyond the potential for changes to tax-law, should long-term investors bother focusing on the market impact of elections?


It is difficult to identify systematic return patterns in elections years.


We encourage caution against making short-term changes to a long-term plan to try to profit or avoid losses from changes in the political winds. For context, it is helpful to think of markets as a powerful information-processing machine. The combined impact of millions of investors placing billions of dollars’ worth of trades each day results in market prices that incorporate the aggregate expectations of those investors. This makes outguessing market prices consistently very difficult.1 While surprises can and do happen in elections, the surprises don’t always lead to clear-cut outcomes for investors.

The 2016 presidential election serves as a recent example of this. There were a variety of opinions about how the election would impact markets, but many articles at the time posited that stocks would fall if Trump were elected.2 The day following President Trump’s win, however, the S&P 500 Index closed 1.1% higher. So even if an investor would have correctly predicted the election outcome (which was not apparent in pre-election polling), there is no guarantee that they would have predicted the correct directional move, especially given the narrative at the time.

But what about congressional elections? Market strategists and news outlets are still likely to offer opinions on who will win and what impact it will have on markets. However, data for the stock market going back to 1926 shows that returns in months when midterm elections took place did not tend to be that different from returns in any other month.

Exhibit 1 shows the frequency of monthly returns (expressed in 1% increments) for the S&P 500 Index from January 1926–Deecmber 2019. Each horizontal dash represents one month, and each vertical bar shows the cumulative number of months for which returns were within a given 1% range (e.g., the tallest bar shows all months where returns were between 1% and 2%). The blue and red horizontal lines represent months during which a presidential election was decided, with red meaning Republicans won, and blue representing the same for Democrats. Gray boxes represent non-decision months. This graphic illustrates that election month returns were well within the typical range of returns, regardless of which party won the election.


EXHIBIT 1

Presidential Elections and S&P 500 Index Returns, Histogram of Monthly Returns


JANUARY 1926–DECEMBER 2019

Past performance is not a guarantee of future results. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio. Source: S&P data © 2020 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved.


The data show that capturing the long-term returns of the capital markets does not depend on which party controls the White House nor Congress. 


While it can be easy to get distracted by month-to-month or even one-year returns, what really matters for long-term investors is how their wealth grows over longer periods of time. 


Exhibit 2 shows the hypothetical growth of wealth for an investor who put $1 in the S&P 500 Index in January 1926. The chart lays out party control of the office of President over time. Again, both parties have periods of significant growth and significant declines during their time in office. However, there does not appear to be a pattern of stronger returns when any specific party is in control. 


EXHIBIT 2

Markets Have Rewarded Long-Term Investors under a Variety of Presidents


Growth of a Dollar Invested in the S&P 500: January 1926–December 2019

Past performance is not a guarantee of future results. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio. Source: S&P data © 2020 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved.


Results similarly appeared random when looking at all Congressional elections and for annual returns (both the year of the election and the year after), and even when there is mixed control of Congress, as seen in Exhibit 3.


EXHIBIT 3

Markets Have Rewarded Long-Term Investors under a Variety of Congresses


HYPOTHETICAL GROWTH OF $1 INVESTED IN THE S&P 500 INDEX AND PARTY CONTROL OF CONGRESS


Past performance is not a guarantee of future results. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio. Source: S&P data © 2020 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved.


Markets have historically continued to provide returns over the long run irrespective of (and perhaps for those who are tired of hearing political ads, even in spite of) which party is in power at any given time.


Equity markets can help investors grow their assets, and we believe investing is a long-term endeavor. Trying to make investment decisions based on the outcome of elections is unlikely to result in reliable excess returns for investors. At best, any positive outcome based on such a strategy will likely be the result of random luck. At worst, it can lead to costly mistakes. 


Accordingly, there is a strong case for investors to rely on patience and portfolio structure, rather than trying to outguess the market, to pursue investment returns.



FOOTNOTES

  1. 1This is known as the efficient market theory, which postulates that market prices reflect the knowledge and expectations of all investors and that any new development is instantaneously priced into a security.

  2. 2Examples include: “A Trump win would sink stocks. What about Clinton?” CNN Money, 10/4/16, “What do financial markets think of the 2016 election?” Brookings Institution, 10/21/16, “What Happens to the Markets if Donald Trump Wins?New York Times, 10/31/16.


IMPORTANT DISCLOSURE INFORMATION

The information in this document is provided in good faith without any warranty and is intended for the recipient’s background information only. It does not constitute investment advice, recommendation, or an offer of any services or products for sale and is not intended to provide a sufficient basis on which to make an investment decision. It is the responsibility of any persons wishing to make a purchase to inform themselves of and observe all applicable laws and regulations. Unauthorized copying, reproducing, duplicating, or transmitting of this document are strictly prohibited. Open Window Financial Solutions, Ltd. accepts no responsibility for loss arising from the use of the information contained herein.

Please remember that past performance may not be indicative of future results.  

Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Open Window Financial Solutions, Ltd. - “Open Window”), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  

Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  

Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Open Window.  

Please remember that if you are a Open Window client, it remains your responsibility to advise Open Window, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. 

To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.

Open Window is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice.

A copy of Open Window’s current written disclosure Brochure discussing our advisory services and fees is available for review upon request. 

Please Note: Open Window does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to Open Window’s web site or blog or incorporated herein, and takes no responsibility for any such content.

All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.