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Does the Stock Market Care Which Presidential Candidate Wins?

By on October 4, 2016
Categories: INVESTING

Since our firm was founded in 1991, we have experienced eight unique election cycles and four (soon to be five) different U.S presidents.  As we approach the November 8th presidential election, many investors may be feeling anxious about the outcome of the vote and any potential effect it may have on the stock market. As the media continues to produce headlines and forecasts designed to invoke fear, we provide some perspective on this important topic.

History shows that presidential elections can certainly have an impact on volatility in the market—but that volatility has typically been short-lived.  Additionally, recent research conducted by Vanguard determined that from 1853 to 2015, average annual stock market returns were nearly equal, regardless of whether a Republican or Democrat was in the White House.

 

Interestingly enough, during this time period there were 12 Democratic presidents, 18 Republican presidents, and one unaffiliated president (Andrew Jackson, 1865-1869). Their administrations embraced varying tax policies and approaches to government, in addition to confronting the challenges unique to their respective terms. However, over the decades studied, there has been little meaningful correlation between a particular political party and the long-term performance of the stock market.

If investors were to invest in stocks only when a particular party held office, they would likely miss out on much of the market upside (as illustrated in the chart below):

 

What about stock market performance in election years, such as the one we are in now? Charles Schwab & Co., Inc. conducted a study looking at data from 1950 to 2015 to determine the average stock market performance in the final year of each presidential cycle (the voting year). The study determined that during the 65-year period, the S&P 500 Index was positive 81% of the time during election years. This is certainly no guarantee of how the stock market will perform this year, but it is sometimes helpful to take the long view.

While uncertainty about the election will linger through early November, we recommend adopting a long-term perspective and ignoring the short-term noise. If your portfolio is well-diversified and aligned with your goals and objectives, election cycles should not cause a shift in your overall investment strategy.  Instead, now is the time to remain focused on the factors within your control, such as how much to spend and save, minimizing costs and taxes, and disciplined rebalancing.

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