How do Stocks Perform in Election Years?

How do Stocks Perform in Election Years?

March 15, 2024

It’s a presidential election year again, which means the news outlets and talking heads are ramping up their talk of doom and gloom if their preferred candidate doesn’t win. Many include poor stock market performance in their dreary predictions too.

This year is looking to be a rematch between Trump and Biden, and we understand that many of you have questions about how the results could affect your investment portfolio. While our crystal balls are still on back order and we can’t predict the future, we will provide some historical context in this blog post that we hope will help calm your fears.

Historical Data Surrounding Election Years

Broad stock market performance is most commonly measured by the S&P 500 index, which is what we will refer to as “the stock market” for the remainder of this blog. When speaking about averages we will be using the median to avoid the skewing effect of outlying data points.

Also, please keep in mind that past performance is no guarantee of future results. Our intent is merely to give insight into how things have been. We will start by examining pre-election, complete election year, and year after election performance.

Pre-election Performance

Since 1944, the median average market return leading up to an election (Jan-Oct) is 5.6%(6.7% annualized). Positive return is always a good thing, but when compared to Jan-Oct periods of non-election years, pre-election periods underperformed by an average of 3.4%.

The most likely explanation for this is what we will call pre-election nervousness. Although most of our clients have remained invested during election periods, we also know plenty of investors that have sold everything and waited for results before buying back into the market. Any kind of large-scale selling such as this can explain lower average return during these periods.

Complete Election Year Performance

When we look at complete election years starting in 1944, we see an average return of 10.7%. The non-election year average return during that same period is only 1.2% higher.

In a sense you could say that election years are “worse” based on those averages, but obviously that data alone wouldn’t call for a hasty pullout from the market. As far as I know, we haven’t had a client yet that complained about a 10.7% return.

Post-Election Year Performance

In the years following presidential elections the average market return was 9.8%. Although that is slightly lower than election years, we don’t really have any clear reasons to explain why. However, what we can conclude is that historically, on average, the years of or after an election haven’t been a dramatic drag on stocks.

Republican Vs. Democrat Outcomes

Most Americans have some amount of concern about what the election of our non-preferred candidate could mean for the economy. Since our country has always used the two-party system,  we will share some market performance data from several Democrat vs. Republican political scenarios in the table below.

The data suggests that there has been slightly better performance from Democratic control of the presidency in the months following elections, with the best performance coming under divided power in congress.

Gridlock in congress is generally viewed as a positive from a stock market perspective because it means less government spending and less legislative change. Both of those things tend to add volatility to the market when done on a large scale.

Source: U.S. Bank Management Group. Data range 1948-2020.

Conclusion

We can’t say for sure that the stock market won’t decline because of the 2024 election, but if you have heard that the stock market doesn’t do well in an election year, you can count that as a myth busted.

Timing the market by trying to get in and out at just the right time may seem easy, but unfortunately nobody really knows what’s going to happen. Quite often we see investors get burned by trying to do too much. So, remember, time in the market is better than timing the market.

If you are feeling lost or concerned about your investments and need a second opinion, contact us today. We build personalized investment plans for our clients and help them make a plan to reach their financial goals. If you want to see more content like this blog post, subscribe to our newsletter by clicking About>Newsletter and clicking the subscribe button at the top of the page.

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connor@3peaksfinancial.com

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Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

Investing includes risks, including fluctuating prices and loss of principal.

3 Peaks Financial does not provide tax or legal advice. Please consult a tax professional before implementing information or strategies found in this publication.

Sources:

https://www.macrotrends.net/2526/sp-500-historical-annual-returns

https://us.etrade.com/knowledge/library/perspectives/daily-insights/election-stock-patterns

https://www.usbank.com/investing/financial-perspectives/market-news/how-presidential-elections-affect-the-stock-market.html#:~:text=There%20doesn't%20seem%20to,16%20non%2Dpresidential%20election%20years.