Elections and the Markets
“In America, anyone can become president. That’s the problem.”
It was November 3, 1992 and the 52nd US presidential election was taking place. The incumbent Republican President George H. W. Bush was running against the younger Democratic Governor Bill Clinton of Arkansas. Throw in the mix an independent businessman Ross Perot of Texas had also thrown his hat in the ring.
Despite the economy rebounding from a recession in spring 1991 and experiencing 19 consecutive months of growth, negative perceptions of its slow progress had an adverse impact on President Bush. With a coalition victory in the Persian Gulf War and 89% approval ratings, Bush’s re-election seemed very likely. But we all know what happened.
I watched all of this take place as a junior in high school. I didn’t really pay much attention to politics. It wasn’t like I could vote at 16. And even if I could, politics never really appealed to me. There was a change coming to the White House and I really didn’t know how it would impact my life. I was more worried about the math test I had that week.
Almost 32 years later and there’s a lot of anxiety surrounding the next presidential election. Many of our clients bring up the topic and I’m commonly asked: Should we make changes to our portfolio before November?
Before I answer that question, I want to make it clear that THIS IS NOT meant to be a political discussion. Regardless of which party you affiliate with or candidate you plan to vote for, there's roughly a 50% chance you’re worried about the next election hurting your portfolio. Not to mention concerns about a recession, rising interest rates, or higher taxes.
That being said, it’s no surprise that emotions run much higher in election years. And any good financial advisor will point out, that’s not the best time to be making financial decisions.
I want to help you become a more educated and confident investor, so let’s review how presidential elections impact the markets.
The Stock Market is Typically Positive During Election Years
Since 1928, we’ve had 24 presidential elections. 82% of the time, the S&P 500 has risen during those election years. Which means that the US stock market was down only 18% of the election years. In fact, since 1950, the S&P 500 has averaged returns of 9.1% in election years, according to research by Fidelity.
Source: Haver, FactSet, FMR. Data spans from November 30, 1950, to November 14, 2023. Years represent the 12-month period from November 30 to November 30 following a US presidential or midterm election. The chart depicts the average, minimum, and maximum price return achieved during this period by the S&P 500.
The Markets Performed Well Under Most of the Different Presidents
Going all the way back to 1961 to John F. Kennedy’s inauguration, you can see in the image below that the S&P 500 only posted a negative return when Richard Nixon and George W. Bush were in the White House.
Source: YCharts
Investing Only During the Presidencies of One Political Party is Bad for your Portfolio
If you decided to make drastic changes to your portfolio based on a president’s political party, for example, investing only during Republican presidencies, then switching to cash when a Democratic president is in the Oval Office (or vice versa), you’re harming your portfolio more than helping it.
If you invested $10,000 in the S&P 500 back in 1950 and kept it invested only when a Republican president was in office, your account would have grown to over $77,000 by March of 2024. That’s a 2.80% annualized return.
If you invested that same $10,000 in the S&P 500 during that same timeframe, when a Democratic president was in office, your account would have grown to over $405,000. That’s a 5.11% annual return.
But what if you just left the funds invested and didn’t shift them in and out of the market? Well, your $10,000 investment would’ve grown to over $3,154,000, for an annual return of 8.05%!!
Source: YCharts
The Economy Continues to Grow Regardless of Who is in the White House
Whether a Republican or Democrat is sitting in the Oval Office, the US Gross Domestic Product (GDP) has grown over the last century. Despite party affiliations and political divides, the US has experienced trillions of dollars in economic growth, helping make it the largest economy in the world. Proving that it is less influenced by the governing party than you may think.
Source: BEA, Haver Analytics, White House History, J.P. Morgan Wealth Management. Data as of Q3 2023. Party indicator is that of the serving president at that time. Markers only represent election years.
A Divided Congress Has Usually Resulted in Better Returns
Historically, having a divided Congress, where one party controls the House or Senate and the other party holds a majority in the second chamber, the US markets have experienced higher average annual returns. Lower returns have come during Democratic majorities in both the House and Senate, while higher returns have taken place under Republican control of both congressional chambers. That being said, the S&P 500 has historically been positive under all six government compositions.
Source: YCharts
Action Items
Now that you have all the facts, it might be a bit easier to take a step back and realize that stock prices represent the profitability of the underlying companies more than the current political party. It’s hard to think about that at the moment, when politics can evoke strong emotions. But you need to make sure you don’t lose sight of your long-term investment goals and make short-term decisions that could alter your financial roadmap.
It might be hard to avoid it, but try to limit your media intake and stay away from social media during elections. The 2024 elections may seem like a big deal right now when it comes to your portfolio, but historically they have had little influence on the direction of the economy and markets. Focus on the fundamentals and stick with your game plan!
~Alex
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