The Impact of Presidential Elections on U.S. Stock Markets
Introduction
Presidential elections in the United States are significant events not only in the political arena but also in the financial markets. Every four years, the uncertainty surrounding the election outcome seems to put investors on edge. Fortunately, markets have had ample experience navigating these periods and tend to behave more rationally than many might expect. Let’s delve deeper into presidential election years and explore what history teaches us about positioning our investment portfolios around election dates.
Election Year Volatility in the Stock Market
U.S. stock markets have traditionally been volatile during election years. This volatility is largely driven by investor sentiment. Many believe that the uncertainty surrounding an election might prompt investors to move away from riskier assets. As these investors become cautious, markets tend to move sideways or even decline. However, this caution leaves room for a post-election rally, which markets often experience, especially if the incumbent is re-elected. The reasoning for this seems to have been that markets are familiar, and thus comfortable with the current administration.
Does the President's Political Party Influence Market Performance?
With this in mind, it begs the question: how much does the political party of the president actually impact market performance over time? Traditionally, Republicans are perceived as more business-friendly, favoring lower taxes, less regulation, and policies that support corporate profitability. Democrats are generally associated with policies aimed at reducing income inequality, expanding social programs, and increasing regulation, particularly in sectors like healthcare, finance, and energy.
Given these implications, one might blindly expect that markets would do significantly better under Republican leadership versus Democratic leadership. However, by taking a closer look at historical stock market data under different presidential parties and candidates, it is clear markets can do well and have done well under both Democratic and Republican presidents. The chart below shows this exact relationship. Due to the complexity and widespread interest around Presidential parties and the stock market, there continues to be extensive research around this topic, with some studies even indicating markets have tended to perform better under Democratic leadership than Republican leadership.
The Role of Economic Inheritance
Perhaps the presidential party receives too much credit—or blame—for the market's performance during its tenure. In my opinion, it is not the president's policies that matter most, but rather the economic environment that the president inherits upon taking office.
Consider two examples to illustrate this point. In 1980, Jimmy Carter, a Democrat, famously handed off to Ronald Reagan, a Republican, a very difficult situation. High inflation, high unemployment, and even a hostage crisis welcomed Ronald Reagan to office. In spite of this, Reagan would eventually preside over one of the strongest stock markets in history.
Fast forward to 2008, where the same thing happened, but this time in reverse. George W. Bush, a Republican, handed off to Barack Obama, a Democrat, a country in the throes of the global financial crisis. Obama enacted his policies, which I think we all could say, would have been in opposition to Ronald Reagan’s more conservative policies that he enacted during his term. And the result? Obama’s presidency also went on to preside over one of the strongest stock markets in history. So here we have two Presidents with very different policies and philosophies, who, each in turn oversaw very strong returns in markets.
These examples suggest that it may not be the president's policies that have the greatest impact on market performance, but rather the economic conditions they inherit. The state of the economy at the beginning of a presidency can set the stage for future market performance, regardless of the administration's policy initiatives.
Furthermore, the president does not operate in a vacuum. He must compromise, work with others, and eventually pass law, which may be closer to the center than at either the Republican or Democratic edge. Furthermore, Historical stock market data indicates that the market tends to perform better under a divided congress than a unified one under either party. Maybe this was the goal of our forefathers all along.
Looking Ahead to the 2024 Election
In a week, we elect a president who will inherit an environment in which the Federal Reserve is cutting interest rates, corporate profits continue to grow modestly, inflation continues to move downward, and energy prices seem to be well under control (pending Middle East fighting). Each of these variables on their own provides an excellent backdrop for risk assets to perform well.
Together they act as a powerful combination for strong economic growth and hold the potential for higher stock prices, regardless of who is sitting in the oval office next year.
www.fidelity.com/learning-center/trading-investing/election-market-impact
Conclusion
Presidential elections undeniably do influence stock market returns, especially in the near term. History shows us this, but I would argue that market performance is driven by many other factors that tend to dominate over which party sits in the White House. Economic conditions, investor sentiment, and market valuation seem to have a much greater impact on the market’s future returns. Investors should approach election years knowing that they may be more volatile, but also knowing that over the long term the stock market tends to be resilient across different political administrations…especially if the president inherits a more-than-decent economic environment.
Elyxium Wealth LLC (“the FIRM ”) is a registered investment adviser located in San Mateo, California. The FIRM may only transact business in those states in which it is registered, or qualifies for an exemption or exclusion from registration requirements.
This presentation is limited to the dissemination of general information regarding the FIRM’s investment advisory services. Accordingly, the information in this presentation should not be construed, in any manner whatsoever, as a substitute for personalized individual advice from the FIRM. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Any client examples were hypothetical and used to demonstrate a concept.
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