Unless you haven’t watched television, read the newspaper, or spent any time online lately, it probably isn’t news to you that 2024 is a US Presidential election year. While it remains to be seen who will take the oath of office next January, it is certain that a torrent of viewpoints and forecasts will be circulated in the days leading up to the election on November 5th. As a financial advisor, I am already hearing objections from some investors that are reluctant in the face of such uncertainty. While the polls and the pundits will inevitably generate discourse regarding the potential ramifications for financial markets, should you allow elections to impact decisions regarding your long-term investments?
It may be prudent to look back over the decades to see if there appears to be any benefit to staying on the sidelines during election years. For the sake of context, markets can be thought of as a sophisticated information processing machine. Daily transactions worth billions of dollars executed by millions of investors have a cumulative effect on market prices, reflecting the investors' collective expectations. This greatly complicates the task of consistently anticipating market prices.
One way to try and understand if Presidential election outcomes serve as any sort of predictor of markets would be to compare stock market performance in election months to non-election months. As you can see in Exhibit 1, historical stock market data dating back to 1926 indicates that monthly returns have not exhibited significant fluctuations in comparison to returns in months devoid of presidential elections.
Exhibit 1. US PRESIDENTIAL ELECTIONS AND MONTHLY RETURNS
Distribution of returns for Fama/French Total US Market Research Index, July 1926—December 2022. Source: How US Stocks Have Behaved in an Election Month
Every horizontal dash corresponds to a single month, while every vertical bar indicates the total number of months in which returns fell within a specified 1% range. For instance, the tallest bar represents every month in which returns ranged from 0% to 1%. The months in which presidential elections were conducted are denoted by the blue and red horizontal lines; red indicates the victory of the Republican Party and blue corresponds to the same outcome for the Democratic Party. The pattern that emerges from he graphic is that there is no discernible pattern related to who wins the election that may inform investment decisions in the short term afterwards.
Another way to look at whether elections matter to investors may be to see how markets behaved over the entire terms of previous Presidents. You can see in Exhibit 2 that stocks have historically rewarded investors, through both Democratic and Republican administrations. Similar to the short term behavior of markets during election months, there doesn’t seem to be any correlation regarding stock market returns and who resides at 1600 Pennsylvania Ave over longer periods either.
Exhibit 2. The Market and US Presidents
Hypothetical $1 invested in the S&P 500 index 1926–2023. Source: The Market and US Presidential Elections
Okay, so if it largely doesn’t matter which party wins the White House, then maybe it’s more important which side runs Capitol Hill, right? Well, as you can see in Exhibit 3, markets have tended to rise in spite of which party is in power.
Exhibit 3. The Market and Control of US Congress
Hypothetical growth of $1 invested in the S&P 500 index 1926–2023. Source: The Market and Control of US Congress
Ultimately, while the policies being promoted by presidents and the laws being passed by Congress have some impact, so do other factors such as interest rates, oil prices, foreign events, technology, etc. History suggests that investors put their capital at risk in companies that focus on making profits and growing their businesses, no matter who lives in the White House or has the upper hand in the House and Senate.
If the uncertainty of the election year has you second guessing your investment strategy, you probably would benefit from reviewing your financial plan. Get in touch if you would like help with that.