Will the Election Affect Investment Returns?
The Presidential election is less than two months away. Some investment clients have asked me if we should prepare for a result that causes
- The stock market to be usually volatile before the election or
- A stock market crash because of a win by President Trump or former Vice-President Biden (choice is highly correlated with political affiliation).
I never forecast the markets and certainly am not going to forecast this. However, analysts have examined the historical record to try to understand the effect of previous Presidential elections on the stock markets. More specifically, does the stock market do better when a Republican is elected or when a Democrat is elected?
Analytical studies on how presidential elections affect the stock market definitely, absolutely indicate that…
...well, there may be some difference in returns but it is hard to tell.
Sorry to disappoint but this is not a question with enough consistent data to yield a statistically strong conclusion. There have only been 58 presidential elections and they occurred during different circumstances (wartime and peacetime; with and without an incumbent; 1800s, 1900s or the 2000s; etc.). A small sample size combined with inconsistent data makes it difficult to show a correlation.
Jurrien Timmer at Fidelity found that, no matter which party won the election, the first two years of a presidential term tended to produce below-average returns while the last two years were above-average.
Mr. Timmer also examined results when the winning President’s political party won control of both the House and Senate, neither the House nor the Senate or just one of the chambers. He concluded that there were differences the first two years of the presidential term but a very small difference over the entire four years.
Dan Clifton (Strategas Asset Management, interviewed in EFT Strategist) found that market performance during the two years after elections favors Republican presidents but performance for the four years after an election either shows no meaningful differences or favors Democrats.
Another example: According to John Rekenthaler of Morningstar, “The rank order of .. performance for the Dow Jones Industrial Average during the first three years in office for each of the past 10 Presidents (excluding John Kennedy and Gerald Ford, who didn't serve 36 months)” was:
1) Bill Clinton (D)
2) Dwight Eisenhower (R)
3) Barack Obama (D)
4) Donald Trump (R)
5) George H.W. Bush (R)
6) Ronald Reagan (R)
7) Lyndon Johnson (D)
Bl George W. Bush (R)
9) Richard Nixon (R)
10) Jimmy Carter (D)
It is difficult to see a pattern in that list. The best and worst returns occurred with Democratic presidents and the second best and second worst with Republican presidents.
Nor do presidential elections appear to affect volatility. A recent Vanguard study (Elections matter, but not so much to your investments) looked at stock market volatility during the 100 days before and the 100 days after Presidential elections. You might expect higher volatility before an election. But Vanguard found no difference in volatility for the 100 days before and after a presidential election. None.
Finally, didn’t the stock market increase after President Trump was elected? Nope. Looking at actual share prices shows that the markets started increasing before the election on November 8, 2016.
The share price for the S&P 500 Index bottomed on Friday November 4 and then increased on November 7 and 8. President Trump’s victory was unexpected by almost all “experts” and no one knew results when the stock market closed at 4 PM EST on November 8. The markets were increasing when Secretary Clinton was expected to win and after President Trump had won.
So, the correlation between election results and stock market performance is not sufficiently strong to serve as an investment strategy. Both election and stock market forecasts are unreliable (article here). Investing based upon whom you think might be elected does not appear to be a good strategy.
Please remember that this is for educational purposes only. Information provided does not constitute a recommendation. Past performance is no guarantee of future performance.