Assessing the impact of presidential elections on the stock market.
Every four years, financial media is abuzz with articles analyzing the coming impact of the presidential election on the stock market, leaving people wondering; should I adjust my portfolio ahead of the outcome? Below we'll take a look at S&P 500 Index returns going into and coming out of every presidential election since 1952.
(price return data calculated using Ycharts. trailing 3 and 6 month periods are not complete for 2020 and reflect price return data from 8/3/20 and 5/3/20 through 9/17/20)
The above table lists the returns during the 3 months and 6 months leading up to election day and the subsequent 1 year and 3 year returns coming out of election day. Just as the media is filled with uncertainty leading into an election, stock returns in the 3 months prior to an election are unpredictable. As you can see from the table, whether or not returns are positive in the few months prior to an election is essentially a flip of the coin and the average return falls right around 0%. With 9 of 17 three month periods yielding positive returns, the 53% positive rate is slightly below what you would typically expect for a 3 month period given that there is a 63% chance that any one month has positive returns (see post on stock returns over different time horizons here). This could be due to the heightened uncertainty, or it could be due to seasonality or the small sample size.
While short-term returns going into the election may be choppy, intermediate-term returns coming out of a presidential election have been largely positive. Of the 17 elections since 1952, 10 of them were followed by positive 1 year returns with a median return for all periods of 7.5%.
Comparing the subsequent returns of Democrat winners vs. Republican winners, the median 1 year return is much higher for the Democrats at 10.26% vs. -1.99%. However, this advantage almost disappears when looking at the subsequent 3 year returns as the median Democrat return has been 32.54% vs. 29.71% during Republican terms. Additionally, there are plenty of other factors affecting these returns that are much more meaningful than what political party is in the oval office. For instance, George W. Bush came into office in the midst of the tech bubble and less than a year later was faced with 9/11, both negative events for the market that greatly impacted the 1 year return following his election.
Ultimately, it is impossible to predict how an election will affect the market or how one president to the next will affect stock returns. The bottom-line is that a well developed, diversified portfolio that is aligned with your long term investment plan will get you through whatever may happen going into and coming out of an election year. There is a lot of noise to block out when making portfolio decisions, and election noise is often best ignored.