How Do Presidential Elections Affect the U.S. Stock Market?
As the 2024 U.S. presidential election draws near, investors are understandably anxious about its potential impact on the stock market. The primary season is ongoing and won’t wrap up until June, yet early indicators suggest a potential rematch between Democratic incumbent President Joe Biden and his Republican predecessor, Donald Trump.
This potential repeat of the 2020 election could trigger a variety of market responses, reflecting the distinct policies and political atmospheres associated with each candidate. Even so, a review of historical data shows that presidential elections generally don’t have a substantial long-term effect on financial markets.
While the future remains uncertain, examining historical trends can offer valuable insights into the relationship between presidential elections and stock market performance. Here’s a deeper look into how past presidential elections have affected the U.S. stock market.
How Do Stocks Perform in Election Years?
Regardless of which party wins the White House, it may be reassuring to know that U.S. stocks have historically generated positive returns in election years. Since 1952, the S&P 500 has returned +7% on average during presidential election years, according to research from LPL Financial.
This is slightly lower than the S&P 500’s average annual gain of just over 10% over a comparable period. However, LPL’s research shows that stocks tend to perform best in years three and four following an election year, boosting the index’s average annual performance.
One notable exception is 2008, when the U.S. presidential election coincided with the height of the Global Financial Crisis. The S&P 500 fell -39% that year, marking one of the worst calendar-year returns in the index’s history.
Understanding the Longer-Term Impact of Presidential Elections on Stocks
Over the long term, U.S. stocks have historically posted gains regardless of which party holds the White House. Data from Blackrock shows that since 1926, despite repeated shifts in the political climate, the S&P 500 has generated a cumulative return of 1,456,754%.
Furthermore, Blackrock’s research found there’s no significant correlation between political party leadership and stock market performance. In other words, staying fully invested over time, no matter which party is in control, has historically yielded stronger returns than investing only in years when Democrats or Republicans were in power.
Staying the Course Despite Near-Term Volatility
Despite the tendency to coincide with years of positive stock market performance, election years also tend to bring heightened volatility as investors react to the uncertainty surrounding potential policy changes.
For example, the 2016 election saw significant market swings due to unexpected election results. Initially, markets fell sharply as networks announced Donald Trump’s victory but quickly recovered and continued to climb, reflecting investor confidence in potential tax cuts and deregulation.
In contrast, amid the COVID-19 pandemic, U.S. stocks also saw increased market volatility leading up to the 2020 presidential election. However, as Joe Biden was declared the winner and vaccines became a reality, markets rallied, driven by hopes of economic recovery and stimulus measures.
What does all this mean for investors? While we may see increased volatility in the near-term, history suggests that the long-term effects of presidential elections on the stock market are generally limited. Instead, data shows that volatility tends to subside and markets rally as the uncertainty leading up to Election Day diminishes.
Historically, investors who have stayed the course long-term have been rewarded for their patience. On the other hand, those who attempt to time the market are far more likely to fall short of their financial goals.
TrueNorth Wealth is here to help.
Although each presidential election can affect the market in unique ways depending on the candidates and their policies, the overall long-term trend of the stock market has been upward, regardless of presidential politics. Indeed, time in the market tends to be a much better predictor of investor performance than political cycles.
If you’re looking to develop a long-term investment strategy that can endure the ups and downs of the market, TrueNorth Wealth is here to help. Our team of fiduciary CFP® professionals can help you craft a comprehensive financial plan designed to get you closer to your financial goals, enabling you to make the most of your financial resources.
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