2020 has obviously been a crazy year, and with the Presidential Election coming up, it is not about to calm down anytime soon. The stock market has been a thrill ride ever since late February, with a big drop and then a steady climb. Tech stocks and Large US stocks have already made it back in the positive territory for the year, while small stocks and international stocks are still lagging.
With that as the backdrop, I have gotten the question “How will the presidential election affect the market?” pretty often. For questions like this I am glad I have my crystal ball with me at all times so I can tell my clients exactly what is going to happen. O wait, I don’t have a crystal ball. But we can learn from history.
Historic Election Year Returns
Looking back at election years since 1928, the S&P 500 (Large US Stocks) has had a positive return 21 times, and a negative return 3 times (1). I think most people would find that hard to believe.
Is there significantly better or worse returns during election years or the year after an election?
The average annual return of the S&P from 1928-2017 was 9.8%. The average return during election years and during the subsequent year were 11.3% and 9.9%, with plenty of volatility. If there was truth to the above speculations, we would consistently see extraordinarily high or low returns during election year followed by a reversal the following year. The data does not bear that out, and there is nothing in the above data that should lead an investor to make any tactical changes to their portfolio during or after election years. (3)
Republican vs Democrat
This is another interesting topic that divides people throughout the country, but is there any stock market effect based on which party gets into power? The data actually surprised me. From 1926 to 2019, we have had a Republican president for 46 years, and a Democratic president for 48 years. The average annual return for the S&P 500 index when we had a Republican President was 9.12%. When we had a Democratic President, the S&P 500 averaged 14.94% per year. (2)
Whatever your political leanings are, this should give you solace knowing that average returns are over 9% long term no matter which party is in the white house.
False Patterns
The worst thing an investor can do is get caught up in trying to find and take advantage of patterns in the stock market. It seems like a good idea, but trust me, it is not in your best interest. For example, there is a super bowl stock market predictor, which states that if the team that wins the Superbowl is a team that had its roots in the original National Football League, then the stock market will decline. There is another pattern showing that every mid decade year ending in 5 (1905, 1915, 1925 etc.) since 1905, has been an up year for stocks. (1) These patterns are just random facts that people try to turn into something that seems important.
The Story of 2016
The 2016 election was a great example of this. Many financial experts and talking heads were predicting a decline in the market if Trump won. On Fortune.com, Katie Reilly reported that Citigroup predicted that a Trump win would have a negative effect on the stock market, believing the S&P 500 index would fall 3% to 5% if Trump was elected. Evelyn Cheng reported on CNBC the day before the election that JP Morgan, Barclays, Citi, and BMO all expected a Trump victory would have a negative impact on the stock market, with Barclays being as bold as saying the S&P 500 could potentially fall 11 to 13 percent. Some went even further with their market predictions.
In an interview with Neil Cavuto, noted billionaire Mark Cuban stated:
“In the event Donald wins, I have no doubt in my mind the market tanks,” Cuban said. “If the polls look like there’s a decent chance that Donald could win, I’ll put a huge hedge on that’s over 100% of my equity positions… that protects me just in case he wins.”
To the surprise of these pundits, the opposite occurred. In just 2 months from November 1st through the end of the year, equity markets had a substantial growth period, with the S&P rising 6%, the Russell 2000 up 14% and the Russell 2000 Value increasing by 18%. (3)
In Conclusion
So the best and most honest answer to the question “How will the presidential election affect the market?”, is “I don’t know, but over the long term, stocks have made between 9 and 12% per year on average.”
By Jimmy Hancock
References
1.Anspach, Dana. “How Does the Stock Market Perform During Election Years?” The Balance. About Inc., 16 Oct. 2016. Web. 01 Nov. 2016.
2.French, Bob. “Are Republicans or Democrats Better for the Stock Market?” McLean Asset Management, 10 July 2020, www.mcleanam.com/are-republicans-or-democrats-better-for-the-stock-market/.
3. Gatliff, Kenny.
On the Money, 23 Sept. 2020, on-themoney.com/2020/08/11/presidential-elections-and-the-market/.
