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What can the election tell us about the stock market? Thumbnail

What can the election tell us about the stock market?

Investing Insights

With both major parties’ national conventions in our rearview mirror, many investors’ heads are spinning with endless prognostications on the upcoming election and what it might mean for their investments. It is tempting to draw a direct connection between who is in office and what will happen in the market. But the reality is, the connection is just not clear. The president certainly matters, but so do the leaders of other countries, global pandemics, vaccine research, individual company decisions and developments, technological advances, interest rates, oil prices, the list goes on. There are so many things that factor into stock prices that it is impossible to say with certainty the impact an election will have.

The outcome of an election itself is uncertain. So is investing. And speculating on one, let alone two, uncertain events can be devastating to a portfolio. Take November 8th, 2016 for instance. Most major polls had shown Clinton as the presumptive winner. As the results came in overnight, the stock markets reacted, with Dow futures declining nearly 900 points, only to be followed by calm at the opening of markets the next day, and consistent positive returns over the next 15 months. Those who decided to pull their money out for fear of a downturn would have missed out on the subsequent year’s growth of nearly 22%. 2016 was a perfect example of just how difficult it is to call the outcome of an election, let alone the market’s response to that outcome.

The last presidential election was not an anomaly. Looking at the performance of the S&P 500 in election years and the years following, we see that on average, returns during election years are positive (around 11%), as are returns in the years following those elections (around 10%).

Chart 1.

But what about stock markets during presidential terms – is there a correlation between which party is in the White House and how the stock market fares? Again, it is just not clear cut. Each presidential term since Hoover, on average, has seen a positive annual return of around 10%. Of the 23 terms in total, 19 had a positive return, 3 had a modest negative return, and only Hoover had a negative return of greater than -20%. But we’ll give him a break, all things considered.

Chart 2. 

To be an investor, you must be willing to bear uncertainty and stick with your investment plan regardless of who is in power. Especially in a year where nothing feels normal, it’s important to remember why we invest - to capture the long-term return of companies. While there are ups and downs, we still have reason to believe that companies will continue to reward us for investing in the long run, just as they have in the past, regardless of who our President may be.

Chart 3.


Disclosures:

Chart 1. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. Index returns are not representative of actual portfolios and do not reflect costs and fees associated with an actual investment. Actual returns may be lower. Source: S&P data © 2019 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved.

Chart 2. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. Index returns are not representative of actual portfolios and do not reflect costs and fees associated with an actual investment. Actual returns may be lower. Source: S&P data © 2020 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. 

Chart 3. 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.