The next presidential election is just weeks away and its potential impact on the market increases with each passing news update. A record number of voters have already cast their ballots. This year will be one for the record books in many respects.
At this point, the election’s outcome is anyone’s guess despite all the media hype to the polling contrary. However, history shows us some interesting trends that could point to where the market might be headed.
Historical Election Year Market Performance
Over the past almost 100 years, the Schwab Center for Financial Research reports the performance of the S&P 500® index (since 1928) ended on a positive note in 17 of the past 23 presidential election years—or 74% of the time —with an average annual return of 7.1%.
In the two calendar years following an election, however, returns tended to be slightly less positive, averaging annual returns of 5.8% and 4.5%, respectively. The real impact of an election’s results are historically seen in the third-year, which has ended in positive territory a whopping 82% of the time, with an average annual return of 13.7%.
In the 100 years analyzed, six presidential election years coincided with down markets and most of those had obvious explanations. For example:
- In 1932, the Great Depression was the culprit
- In 1940, the brink of World War II
- In 2000, the tech bubble burst
- In 2008, the fallout from the financial crisis.
In other words, market performance in those years likely had little to do with the presidential election as much as other prevailing factors. And this year may follow suit, because of the covid-19 pandemic.
Political Parties and the market
Investors often question: Is the market driven by politics or is it the other way around? The answer is: It’s really a lot more complex than that.
Markets are typically influenced by many different factors such as business cycles, corporate profits, and globalization—to say nothing of black swan events like the 9/11 terrorist attacks.
So which political party administrations have historically performed better, Democrats or Republicans? If we look at the numbers alone, the short answer may surprise you because it’s so counter-intuitive to conventional wisdom. Over the nearly last 100 years, the market has performed better under Democrats!
Since 1929, the total return of the S&P 500 has averaged 57.4% under democratic presidential administrations, versus just 16.6% under Republicans. However, remember that there are many factors to consider. For instance, given that markets move in cycles and there is always a lag in the economy with policy changes by a given administration, this could be one reason for the disparity.
It may be more reliable to look at the market’s influence on election outcomes because that has a 87% success rate of predicting who will take the White House. Notably, when the S&P 500 has risen in the three months before an election, the incumbent party generally has gone on to win the white house; when it has fallen, the incumbent party has generally lost. Since 1928, this trend has been broken just three times – and it hasn’t missed since 1980.
While there are some interesting patterns between market performance and presidential elections, past performance is no guarantee of future results. Thus, the best option is to have a risk management game plan you’re comfortable with headed into elections—regardless of who prevails this November.