Elections and the Markets

The 2020 Presidential Election is nearly upon us. Financial and political news, as well as social media more broadly, continues to put this front and center in our daily lives. Election news has also highlighted the market with an intense focus on short-term market fluctuations.

Often around election season, market volatility rises given the uncertainty of an election’s outcome. While this is true, we wanted to highlight data that shows that historically, elections have not negatively affected the long-term returns of the stock market.

One thing has been constant throughout time and across different presidential administrations: the market has rewarded long-term, disciplined investors. The graph below is a good example of that.

 

 

While examining the different Presidential administrations is interesting, it is also interesting to note the history of market returns when the different political parties control Congress. What we find is a very similar story: investors are rewarded for long-term thinking — and which party controls congress has mattered little to the market when looked at over long periods of time.

 

 

If we take it one step further and look at the variability of monthly returns for the S&P 500 Index, we find that there is little discernible difference between election years and non-election years. Similarly, there is little difference in investment returns under Republican versus Democratic administrations.

 

 

The above chart provides a great example of just how wide the dispersion of returns can be in any given year or month. It also provides an important reminder of the potential returns that investors could miss by being out of the market for any given period.

Of the 23 elections that took place between 1926 and 2019, there have been only 4 election years where the markets ended in negative territory: 1932 (Roosevelt vs. Hoover), 1940 (Roosevelt vs. Willkie), 2000 (Bush vs Gore), and 2008 (Obama vs. McCain). In each of these election years there was an event unrelated to the election that caused these negative returns. 1932 puts us in the middle of the Great Depression, the 1940 election took place during World War II, the 2000 election occurred as the Dot Com Crash was underway, and the 2008 election occurred during the Global Financial Crisis.

In the moment, it may feel like mid-term or Presidential elections will have an outsized impact on market returns but historically this has not been the case. The best strategy has been to remain invested. Though we do anticipate some volatility in the run up to the elections themselves, this volatility stems from uncertainty, but once there is clarity around the outcome of the election this volatility has subsided quickly.

If you have questions, we do encourage you to reach out to your advisor. For additional information on elections and the market, please take a look at the recent webinar hosted by Sheila Schroeder, Business Development Officer, and Chip Pyfer, Lead Advisor and Principal. Watch Here.

 

Sources:

  • Dimensional Fund Advisors data and charts.

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