Presidential Elections & Market Results

In investing, politics is a factor, not the factor.

As we approach the conclusion of the U.S. presidential election, investors may wonder whether the market will rise or fall based on who is elected.

While major events, including elections, can influence stock movements, identifying direct correlations is tricky. Market prices are affected by a wide range of factors, and politics is just one among many.

Predicting the outcome and then the potentially separate market reaction, especially in a politically charged environment, is difficult. Accordingly, there is a strong case for investors to rely on patience and portfolio structure rather than political predictions to pursue investment returns.

The 2024 Presidential Election

The chart below lays out party control of the office of the President and market returns. Again, both parties have periods of significant growth and significant declines during their time in office.

It is difficult to identity systematic return patterns in election years. Fortunately, stocks have trended upward across the administrations of both political parties. 

Markets Have Rewarded Long-Term Investors Under a Variety of U.S. Presidents

Hypothetical Growth of $1 Invested in the U.S. Stock Market (with Party Affiliation of the President)

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. Data presented in the growth of $1 chart is hypothetical and assumes reinvestment of income and no transaction costs or taxes. The chart is for illustrative purposes only and is not indicative of any investment. Source: Dimensional Fund Advisors LP. S&P data © 2024 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. 

"U.S. Stock Market" as represented by the S&P 500 Index. January 1926 - December 2023.

On average, market returns have been positive both in election years and the subsequent year.

Politics Is A Factor, Not The Factor

It may be helpful to think of the stock market as a powerful information-processing machine. The impact of millions of investors placing billions of dollars worth of trades each day results in market prices that incorporate the expectations of those investors. U.S. elections have an impact on market returns, but so do hundreds, if not thousands, of other factors—the actions of individuals, businesses, foreign leaders, a global pandemic, changes to interest rates, inflation, rising and falling oil prices, and technological advances, just to name a few.

Presidential Elections and Monthly U.S. Stock Market Returns

Distribution of Returns, JANUARY 1926–DECEMBER 2023

Consider the illustration of monthly market returns below. Each horizontal dash represents one month. Each vertical bar shows the combined number of months for which returns were within a given 1% range. For instance, 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.

Can you identify a systematic return pattern in election years?

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. Dashes representative returns for a given month are stacked in ascending order of return within each column, with highest return within that range on top. Source: Dimensional Fund Advisors LP. S&P data © 2024 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. 

Histogram of Monthly Returns. "U.S. Stock Market" as represented by the S&P 500 Index.

Election month returns were well within the typical range of returns, regardless of which party won the election.

What's An Investor To Do?

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. 

That does not mean election-related events won’t cause uncertainty. Uncertainty might even increase for a time. But for those that can keep politics and investment policy separate there tend to be brighter days ahead. 

Stocks have rewarded disciplined investors through Democratic and Republican administrations. A well-structured portfolio should be built to see multiple election cycles through and expect to come out ahead.

The Sage of Omaha can say it much more succinctly: 

If you mix politics with your investment decisions, you’re making a big mistake.

Don't allow your finances to add more uncertainty to your life than necessary. If we can help, let's start a conversation today. Call us at (775) 827-0670 or schedule a Quick Connection time with us at www.openwindowFS.com/connection.

FOOTNOTES

1. Examples 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.