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Election Year Jitters

Election Year Jitters

March 11, 2024

Key Takeaways:

  1. Market performance during election years isn’t meaningfully different from average market performance overall.
  2. Which political party wins doesn’t correlate to investment results. Markets tend to rise in election years regardless of the outcome, although they favor certainty (incumbent party victors) versus uncertainty (opposing party victors).
  3. Maintain a long-term perspective and don’t get caught up in the election hype. Screen out the election noise and focus on reaching your personal financial goals.

 

Do Stocks Tend to Tumble During Election Years?

As the presidential primary season kicks into gear, it's natural for many Americans to harbor concerns about the impact of potential leadership changes on the stock market. However, delving into historical data spanning the last 95 years, we find that market movements during election years are often more favorable than feared, aligning closely with broader market trends.

Despite concerns about heightened volatility, the numbers paint a reassuring picture. There have been 24 presidential elections since the inception of the S&P 500 index in 1928, and the index has produced positive returns in 18 of those years, or 75% of the time. While the average returns during election years are slightly lower at 7.63% compared to the broader average of 7.91% over the same period, the variance is marginal. Even when factoring in maximum drawdowns, or market declines, the disparity between election years (10.91%) and all years (10.23%) remains negligible.[1] This suggests that market downturns during election cycles are not markedly more severe than during typical years.

 

Source: Morningstar Direct

Does the Election Outcome Matter?

We’ve seen booms and busts on both sides of the aisle following an election, and there is a lack of definitive correlation between market performance and the political party assuming office. Rather, market fluctuations appear to be more closely tethered to prevailing economic conditions rather than electoral results.

For instance, in the 2020 presidential election, it was the reopening of the economy following the COVID-19 pandemic that impacted markets most, rather than the differing ideologies between candidates. Or consider 2008, when the unfolding Global Financial Crisis caused a market collapse rather than opposing candidate views on the war in Iraq or healthcare policy.

Although there is no clear correlation between a particular party assuming office and market performance, one thing we know is that the market prefers the familiar over the unknown. We note that when the political party holding office remains the same rather than changing hands, market returns tend to be stronger, with an average of 9.45%. Nonetheless, average returns are still positive when the political party changes hands, with an average return of 2.53%.[2] In addition, the market has produced positive returns the majority of the time in the year following the election, regardless of which party emerges victorious.

  
Source: Morningstar Direct

Maintaining Perspective Amidst Uncertainty

As we navigate through the ebbs and flows of electoral uncertainty, it's crucial to maintain perspective and focus on your long-term investment objectives. We believe that the economy will remain the primary driver of markets broadly, and we are committed to monitoring the evolving economic landscape and making informed decisions to safeguard your investments. Remember, while elections may introduce short-term uncertainty, maintaining a disciplined approach and staying invested according to your financial plan is key to achieving your long-term goals. Should you have any questions or concerns, please don't hesitate to reach out to your dedicated advisor.


[1] Morningstar Direct. S&P 500 price returns from 1928-2023. 

[2] Morningstar Direct. S&P 500 Index price returns. USA.gov/election-result