Presidential Elections: What Do They Mean for Markets?
Key Takeaways
It would be natural to assume that the heightened emotions and uncertainty of an election year could substantially impact market sentiment and performance.
However, historical data does not back up this intuition. Rather, markets have historically generally continued to rise in election years.
It's important to remember that markets are nonpartisan.
Portfolio positioning should generally be dictated by a long-term plan rather than by current events.
Investors may be understandably apprehensive that the ups and downs of this election year could have eventual impacts on the market.
But the emotional news-cycle rollercoaster of election years has often had less impact on markets than voters might assume, and history shows the challenges of trying to make investment decisions timed to an election year.
We would caution investors against making changes to a long-term plan in a bid to profit or avoid losses from changes in the political winds. This makes consistently outguessing market prices very difficult. Here are 4 takeaways for investors looking to navigate their portfolios through this year's election cycle—and beyond.
1. Historcially, US markets have genrally risen in election years
There have been 24 elections since the S&P500 Index began all the way back to 1927. In these election years:
19 of the 23 years (83%) provided positive performance (2020 data not yet compiled)
When a Democrat was in office and a new Democrat was elected,the total return for the year averaged 11.0%
When a Democrat was in office and a Republican was elected,the total return for the year averaged 12.9%
Since 1927, the avergae annual return of the US stock market during a preseidential election year is 11%
source: https://www.troweprice.com/financial-intermediary/us/en/insights/articles/2024/q2/how-do-us-elections-affect-stock-market-performance.html in USD
2. Betting on a specific sector can be highly risky
While it’s possible to anticipate potential policy impacts at a very high level, the reality is that at this stage no one can predict with any certainty what sectors, industries, or stocks may benefit from the next administration’s policies.
There are very few consistent patterns of relative sector returns in election years, as shown in the chart below.
source:https://www.fidelity.com/learning-center/trading-investing/election-market-impact in USD
3. Markets are nonpartisan
Although popular myths sometimes suggest that one party or the other is “better” for market returns, the historical data does not bear out these theories.
The S&P 500 has historically averaged positive returns under nearly every partisan combination, as the chart below shows.
source:https://www.fidelity.com/learning-center/trading-investing/election-market-impact in USD
note: Data excludes 2001 to 2002 due to Senator Jeffords changing parties in 2001. Calendar year performance from 1933 through 2022. Source: Strategas Research Partners, as of November 5, 2023.
4. Investors should focus on fundamentals and stick with their plans
It can be tempting to put your money where your convictions are—whether you feel optimistic or pessimistic about this year's election.
Historically, however, financial markets have largely been unbothered by both presidential and midterm elections, and trying to adjust your investment strategy in the hopes of capitalizing on an anticipated post-election swing in the markets could end up backfiring on you.
Elections tend to have less impact on the markets than politicians may like to believe.
Vote with your ballot, not your life savings. After all, the market isn’t a reflection of who gets elected president but of the efforts of companies to solve problems and provide goods and services. In the long run, innovation succeeds, no matter what politicians do.
source: Dimensional Fund Advisors Canada ULC January 25, 2024, in USD
This document is provided as a general source of information and should not be considered personal, legal, accounting, tax or investment advice, or construed as an endorsement or recommendation of any entity or security discussed. Every effort has been made to ensure that the material contained in this document is accurate at the time of publication. Market conditions may change which may impact the information contained in this document. All charts and illustrations in this document are for illustrative purposes only. They are not intended to predict or project investment results. Individuals should seek the advice of professionals, as appropriate, regarding any particular investment. Investors should consult their professional advisors prior to implementing any changes to their investment strategies. Past performance is not a guarantee of future results. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio.
The opinions expressed in the communication are solely those of the author(s) and are not to be used or construed as investment advice or as an endorsement or recommendation of any entity or security discussed.