Stocks and the Presidential Election

 

By Heather Hoffman, Marketing and Communications Specialist

11/2024

 

As election day looms, investors are likely wondering what to expect with the stock market. Historical data can give some insights, but not guarantees, into stock performance around election day.

 

 

Will the stock market predict who will win the presidential candidate?

Well, nothing with the stock market is truly predictable. But, from the last 24 elections, this connection has rung true 20 times: When stocks are positive for the three month period before election day, the incumbent party stays. When they are negative, a new party takes over. Since 1928, this has been true around 80% of the time. If this predictor follows the pattern, then the democratic ticket with Harris is expected to win. In 2020, the incumbent party lost, despite positive returns leading up to the election. This shows it’s an interesting pattern but can’t be taken as a guarantee.

 

What party produces the greater returns?

It depends how you look at the data. Since the inception of the S&P 500 in 1957, it has a combined annual growth rate (CAGR) of 7.4%. So, on average, it has returned 7.4% annually, excluding dividends. The median CAGR of each party is as follows:

Democratic presidents: 9.3%

Republican presidents: 10.2%

Based on this, it’s logical to say the stock market performed better under Republican presidents. But when you look at the data another way, it tells a different story. When evaluating the S&P 500’s median one-year return under each president, the top party changes:

Democratic presidents: 12.9%

Republican presidents: 9.9%

Based on this, the conclusion would be that Democratic presidents result in a better stock market. This serves as a reminder that data can easily be manipulated to fit a new conclusion. So what party actually produces the greater return? Historical data has shown that having consistent investments, instead of only investing during either party, has created far better returns. Consider the hypothetical performance of $10,000 invested in the stock market from 1949- 2022

Democratic presidents only: $3.29 million

Republican presidents only: $1.04 million

All Years Invested: $34.32 million

Stocks have performed well under both parties, and time in the market can be a powerful tool.

 

What will happen to the market around election day?

As always, the answer is, “Who knows?” When looking at historical data, the third quarter of year four of the presidential cycle has been below-average for stocks. For this year, the third quarter had a 5% gain, which is above the typical average. For the fourth quarter of an election year, markets have historically seen positive returns 83.3% of the time. In general, markets react positively after the election, as the current looming uncertainty is removed. Again, these are just trends and not guarantees.

 

What sectors will perform better based on who wins?

Because of the difference in policies between the candidates, there could be market “winners and losers” for each candidate. Of course, we can’t forget checks and balances, so the party that controls the House and/or Senate likely also has an impact. LPL Research shared their thoughts on the outcome of each candidate:

Again, the presidential election isn’t the only election result that could have an impact. We can’t predict with 100% accuracy what policies will truly be carried out, and what impact they will have.

 

So … what do I do?

Probably nothing. With all of the volatility surrounding this presidential race, including a candidate drop out and assassination attempt, the environment seems far from typical. Continue to follow your financial plan, and understand that there are many other factors at play that affect the stock market. If you decide you do want to switch up your investment strategy, consult with your Financial Advisor to discuss your options.

 

Sources:

https://finance.yahoo.com/news/heres-average-stock-market-return-084500070.html

https://money.com/stock-market-predicts-presidential-elections/

https://www.lpl.com/content/dam/edam/trends-and-economic-conditions/elections/election-insights-brochure-2024.pdf

https://www.lpl.com/research/blog/stock-markets-what-to-expect-when-were-electing.html

 

The opinions voiced are for general information only and are not intended to provide specific advice or recommendations for any individual.