This could come as a surprise to many of you, but we have a presidential election coming up! And, while there may be policy implications (at the State and Federal level) that result from the outcome of next week’s election, historically, the investment markets implications are far less significant. In fact, many economists and long-time investment commentators will argue that who wins the election is virtually irrelevant to the stock market.
It is a natural instinct for investors to presume a connection between who wins the Presidential election and the near term movement of the stock market. However, the data does not show a meaningful connection that would reliably allow an investor to “beat the market” based on election results. This cycle may be a little different but I suspect even this election’s resulting volatility will be short-lived… from a markets perspective.
The article below, Presidential Elections: What Do They Mean for Markets? (Dimensional, 2024), explores this concept in more depth, using nearly a century of data to demonstrate how markets have historically reacted to election outcomes.
Presidential Elections: What Do They Mean for Markets?
It’s almost Election Day in the US once again. While the outcome may be uncertain, one thing we can count on is that plenty of opinions and predictions will be floated in the days surrounding the vote. In financial circles, this will inevitably include discussion of the potential impact on markets. But should elections influence long-term investment decisions?
We would caution investors against making changes to a long-term plan in a bid to profit or avoid losses from changes in the political winds. For context, it is helpful to think of markets as a powerful information-processing machine. The combined impact of millions of investors placing billions of dollars’ worth of trades each day results in market prices that incorporate the collective expectations of those investors. This makes consistently outguessing market prices very difficult.
Furthermore, data for the stock market going back to 1926 shows that returns in months when presidential elections took place have not tended to be that different from returns in any other month. Exhibit 1 shows the frequency of monthly returns (expressed in 1% increments) for a broad-market index of US stocks from January 1926–December 2023. Each horizontal dash represents one month, and each vertical bar shows the cumulative number of months for which returns were within a given 1% range (e.g., the tallest bar shows all months in which returns were between 1% and 2%). The blue and red horizontal lines represent months during which a presidential election was held, with red meaning a Republican won the White House and blue representing the same for Democrats. This graphic illustrates that election month returns have been well dispersed throughout the range of outcomes, with no clear pattern based on which party won the presidency.
EXHIBIT 1
Distribution of Monthly Returns for the S&P 500 Index, January 1926–December 2023
Past performance is not a guarantee of future results.
In USD. Dashes representing returns for a given month are stacked in ascending order of return within each column, with highest return within that range on top. S&P data © 2024 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio.
It’s natural for investors to look for a connection between who wins the White House and which way stocks will go. But shareholders are investing in companies, not a political party. And companies focus on serving their customers and helping their businesses grow, regardless of who is in the White House.
Stocks have rewarded disciplined investors over the long term, through Democratic and Republican presidencies. Making investment decisions based on the outcome of elections, or how investors think they might unfold, is unlikely to result in reliable excess returns. On the contrary, it may lead to costly mistakes. Accordingly, there is a strong case for investors to rely on a consistent approach to asset allocation—making a long-term plan and sticking to it.
