How do Elections or Party in Power Affect Stock Returns?
Market Returns and Election Years
On November 3rd, millions of Americans will cast their vote for the next President of the United States. Although the outcome of the election is uncertain, one thing we can count on is that plenty of opinions and prognostications will be floated in the months leading up to Election Day. In financial circles, this will almost assuredly include perceptions and opinions of market impacts. But, should long-term investors focus on presidential elections?
It is natural to draw a connection between the administration in power and the influence they may have on markets. However, we would caution investors against making short-term changes to a long-term plan to try to profit (or avoid losses) from changes in the political landscape. The 2016 presidential election serves as a recent example of the risks associated with trying to forecast market movement based on election results. There were a variety of opinions about how the election would impact markets, but many articles at the time posited that stocks would fall if Trump were elected. One article went as far to say, "Wall Street is set up for a major crash if Donald Trump shocks the world on Election Day and wins the White House." Yet, despite President Trump being in office, along with ever-present uncertainty arising from a host of events including the Brexit vote, negative interest rates, trade wars, and geopolitical turmoil in the Middle East, to name a few, the markets reached all-time highs prior to COVID-19.
While it may be easy to get distracted by month-to-month or even one-year returns, what really matters for long-term investors is how their wealth grows over longer periods of time. The chart below shows the hypothetical growth of wealth for an investor who put $1 in the S&P 500 Index in January 1926. The chart on the next page lays out the political party of the President in office; red denotes time periods when a Republic President was in office and blue represents a Democratic President. We see that both parties have periods of significant growth and significant declines during their time, however, there does not appear to be a pattern of stronger returns when any specific party is in office. The key takeaway is that markets have historically continued to provide positive returns over the long run irrespective of which party is in the oval office.
Equity markets can help investors grow their assets and we believe investing is a long-term endeavor. Predicting election results as a way to alter one’s portfolio 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 a costly mistake.