How Do Presidential Elections Affect the Stock Market?
As 2024 shapes up to be a pivotal election year, many investors are concerned about the outcome of the U.S. Presidential Election and its potential impact on the stock market. With President Joe Biden and former President Donald Trump emerging as the likely frontrunners, we may be heading for a repeat of the 2020 election.
This scenario could trigger a variety of market responses, reflecting the distinct policies and political atmospheres associated with each candidate. However, a review of historical data shows that presidential elections generally don't have a substantial long-term effect on financial markets.
While short-term volatility is common during election seasons due to increased uncertainty, the U.S. stock market has consistently trended upward over the long term, regardless of which party occupies the White House. Understanding this historical relationship between presidential elections and stock market performance can help you make more informed investment decisions and avoid knee-jerk reactions that hinder your progress toward long-term goals.
How Stocks Perform in Election Years
Historically, the U.S. stock market has exhibited distinct patterns during presidential election years. For instance, in the months leading up to an election, market volatility tends to increase as investors grapple with the uncertainty surrounding the outcome and its potential economic implications.
However, a closer look at market trends in the months following past elections reveals a more nuanced picture. Specifically, in the immediate aftermath of an election, the stock market often experiences a brief period of increased volatility as investors adjust to the new political reality.
This volatility can be particularly pronounced if the election results are unexpected or if there’s a prolonged period of uncertainty. One notable example is the contested 2000 election between George W. Bush and Al Gore, when the S&P 500 fell -7.8% from Election Day through year-end.
Despite these short-term fluctuations, the stock market has generally displayed resilience during election years. In fact, research from LPL Financial shows that since 1952, the S&P 500 has generated an average return of +7% during presidential election years, suggesting that the market tends to adapt relatively quickly to new administrations and their policies.
Understanding the Longer-Term Impact of Presidential Elections on the Stock Market
Depending on the analysis period, historical returns may suggest that the stock market performs better under one party compared to the other. For instance, from 1952 through June 2020, the average annual real return for the S&P 500 was +10.6% under Democratic presidents and +4.8% under Republican presidents, according to a recent Forbes analysis.
However, stock market performance doesn’t always move in lockstep with the economy (or election cycles, for that matter). For example, Bill Clinton was president during one of the most noteworthy economic expansions and bull markets in history; however, George W. Bush was actually in the White House when the expansion began.
Despite the performance patterns that tend to emerge leading up to and following election years, U.S. stocks have historically posted gains over the long run regardless of which party is in the White House. In fact, over the last 50 years (as of April 30, 2024), the S&P 500 has delivered an average annual return of +11.35%.
In other words, while presidential elections can create short-term volatility, historical evidence indicates that the stock market's long-term performance is more closely tied to the underlying strength of the U.S. economy and the resilience of the companies that drive it. Thus, investors should be cautious about making investment decisions solely based on election outcomes.
Additional Considerations for Investors
While understanding the historical relationship between presidential elections and the stock market can be helpful, it's important to recognize the limitations and caveats of these analyses.
First, elections are inherently unpredictable. Despite the increasing sophistication of polling methods and political forecasting, there’s always the potential for unexpected outcomes or events that can significantly impact the market. The 2016 U.S. presidential election, for example, defied many pollsters' predictions and led to a brief period of market volatility before stocks ultimately rebounded.
Additionally, it's crucial to remember that presidential elections are just one of many factors that can influence the stock market. Economic indicators, such as GDP growth, inflation, and employment rates, as well as corporate earnings, interest rates, and global events, all play significant roles in shaping market sentiment and performance. In many cases, these factors outweigh the impact of an election.
Staying the Course During Election Years
While presidential elections can influence short-term stock market performance, historical data suggests their long-term impact is relatively limited. Over time, the market has shown remarkable resilience and the ability to adapt to new administrations, regardless of which party holds power.
As an investor, it's crucial to maintain a long-term perspective and stay focused on your financial goals. By staying informed and sticking to your investment plan, you can successfully navigate short-term market fluctuations and position yourself for long-term financial success.
If you’re looking for personalized financial planning and investment guidance, we’re here to help. Contact us today to develop a comprehensive plan that supports your financial objectives and paves the way for a secure financial future.