Effect of Elections on Equity Markets

Introduction & Background

Are markets driven by elections? Empirical analysis argues that market reactions to US presidential elections are brief and loosely correlated. Moreover, any effect seems at best secondary to the greater macroeconomic factors steering the economy at election time, such as global pandemics, corporate earnings, interest rates, and structural changes. 

Since the start of the S&P in 1927, there have only been 24 discreet observations that may be used to model  the effect of presidential elections on markets. Generally, election year markets tend to be worse performers than those in non-election years (T.Rowe Price 2024). However, the differential is moderate, with the average annual return in election years 60-basis points lower than in non-election years. Please see table T1 (T.Rowe Price 2024).

T1: S&P 500—Election vs. Non-Election Years

Interestingly, 54% of all presidential elections occurred during a recessionary macroeconomic environment, and this likely had a greater impact on market performance than the actual election (T.Rowe Price 2024). Superficially, volatility does appear to increase prior to an election. Yet, when volatility around Election Day is compared to volatility levels on the first Tuesdays in November non-election years, the level of election year volatility proves statistically insignificant (T.Rowe Price 2024) (Lefkovitz and Pillai, n.d.). 

Regardless of the winning party, markets have historically rallied post-election, likely because markets abhor ambiguity. Upon the selection of the next president, market participants reward clarity with higher returns. 

Democrat vs. Republican

General wisdom states a Democrat president is better for the market than a Republican. Yet, this finding holds only when considering performance during periods in which one party controls the Executive branch but is the minority in the Legislative branch. In such situations, Democrat presidents have outperformed Republican presidents by 160-basis points at 9.0% vs. 7.4% (Patton 2021).

Thus, regarding the question of which party’s president is better for the market, analysis demonstrates the answer is more nuanced than a simple binary categorization of Democrat or Republican. Performance appears to be a multivariate factor that is sensitive to a party’s level of inter-branch plurality. Please see chart C1 (Patton 2021). 

C1: Average Market Returns—Democrat vs Republican 1946–2020

For example, when the Republicans control both the Executive branch and the Senate, but the Democrats maintain control of the House, the Republican president has enjoyed a 460-basis point higher average annual return (Patton 2021). The data reflects the fact that the president, in isolation, has only a partial effect on the market, and that it is the combination of political parties in different branches that has historically manifested performance variance. 

A quick look at the last four presidents in table T2 summarily reinforces the findings of inconsistent performance (T.Rowe Price 2024).

T2: Market Performance (Equity & Fixed Income)—Select Presidents

Factors Beyond Presidency

Since political factors, including the presidency, are weak predictors of market behavior, it may be prudent to consider other potential causal factors. In the following tables, each of the last four US presidents are contextualized regarding the events that were major market catalysts during their presidency (Lefkovitz 2024). 

T3: G.W. Bush—Economic Events

T4: Barack Obama—Economic Events

T5: Donald Trump—Economic Events

T6: Joe Biden—Economic Events

As the above tables exemplify, various events, largely unforeseen, occur during a president’s term that are beyond their command. 

Even trades, such as 2016’s “Trump Bump,” which was a rally in small-cap value premised upon the idea that Trump’s policies would benefit the sector, were short lived. By year end 2017, small-cap value proved the worst performer as Trump’s agenda failed to materialize, and large cap growth closed the year as the top sector (Lefkovitz and Dziubinski 2024). 

Conclusion

Presidential elections and political parties have a mixed track record apropos of predicting market behavior. Furthermore, if one considers only presidential elections, there are 24 discreet data points upon which to draw conclusions, meaning the data pool is small and any causation and correlation may be statistically insignificant. Thus, as a singular investment factor, elections, including presidential and general, are quantitively weak predictors of market returns. 

However, there is the possibility that a new president could use the bully pulpit to initiate actions that will influence the market, particularly in the areas of retirement, healthcare, and taxation (Fredlick, n.d.). That said, substantive changes generally require the approval of Congress, as Congress is the branch that ultimately regulates taxation and spending. Therefore, executive policies tend to be far more moderate than presidential rhetoric. Additionally, it is the Federal Reserve, an apolitical body of the government, that oversees monetary policy (Lefkovitz and Dziubinski 2024). The point being the president does not singularly pilot the economy. 

In conclusion, yes, elections are important for the market. However, what is more consequential is the underlying economic conditions, both globally and domestically, and the cash flow generation of the market. Thus, for a long-term investor looking for reliably strong, risk-adjusted, multi-year returns, political elections should be less important than being invested in a well-diversified portfolio. 

Sources:

_{T.Rowe Price. 2024. “How Do U.S. Elections Affect Stock Market Performance?,” May.}

_{Lefkovitz, Dan, and Aditya Pillai. n.d. “How-Will-US-Elections-Affect-Markets-v3.Pdf.” Accessed July 24, 2024. https://assets.contentstack.io/v3/assets/bltabf2a7413d5a8f05/blt8173f447c7022f44/6622fd7bac4b005e7dc40e07/How-Will-US-Elections-Affect-Markets-v3.pdf.}

_{Fredlick, Emelia. n.d. “How the 2024 Election Could Affect Your Portfolio | Morningstar.” Accessed July 24, 2024. https://research.morningstar.com/articles/YOUN7O4G6JDV5CS5DMDAB7Q2II/how-the-2024-election-could-affect-your-portfolio.}

_{Patton, Mike. 2021. “Stock Performance And The Political Party In Power: An Historical Look At The Past 75 Years.” Forbes. January 21, 2021. https://www.forbes.com/sites/mikepatton/2021/01/12/stock-performance-and-the-political-party-in-power-an-historical-look-at-the-past-75-years/.}

_{Lefkovitz, Dan, and Susan Dziubinski. 2024. “How to Position Your Investment Portfolio Before the 2024 Election.” Morningstar, Inc. April 17, 2024. https://www.morningstar.com/markets/how-position-your-investment-portfolio-before-2024-election-2.}

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