Presidential Elections and the Stock Market
Americans will elect the next president of the United States on November 8.
While the outcome is unknown, one thing is certain: There will be a steady stream of opinions from pundits and prognosticators about how the election will impact the stock market. As we explain below, investors would be well‑served to avoid the temptation to make significant changes to a long‑term investment plan based upon these sorts of predictions.
Short-Term Trading and Presidential Election Results
Trying to outguess the market is often a losing game. Current market prices offer an up-to-the-minute snapshot of the aggregate expectations of market participants. This includes expectations about the outcome and impact of elections. While unanticipated future events—surprises relative to those expectations—may trigger price changes in the future, the nature of these surprises cannot be known by investors today. As a result, it is difficult, if not impossible, to systematically benefit from trying to identify mispriced securities. It is unlikely that investors can gain an edge by attempting to predict what will happen to the stock market after a presidential election.
Exhibit 1 shows the frequency of monthly returns (expressed in 1% increments) for the S&P 500 Index from January 1926 to June 2016. Each horizontal dash represents one month, and each vertical bar shows the cumulative number of months for which returns were within a given 1% range (e.g., the tallest bar shows all months where returns were between 1% and 2%). The blue and red horizontal lines represent months during which a presidential election was held. Red corresponds with a resulting win for the Republican Party, and blue with a win for the Democratic Party. This graphic illustrates that election month returns were well within the typical range, regardless of which party won the election.
Presidential Elections and S&P 500 Returns
Histogram of Monthly Returns, January 1926–June 2016
Long-Term Investing: Bulls & Bears ≠ Donkeys & Elephants
Predictions about presidential elections and the stock market often focus on which party or candidate will be “better for the market” over the long run. Exhibit 2 shows the growth of one dollar invested in the S&P 500 Index over nine decades and 15 presidencies (from Coolidge to Obama). This data does not suggest an obvious pattern of long-term stock market performance based upon which party holds the Oval Office. The key takeaway here is that over the long run, the market has provided substantial returns regardless of who controlled the executive branch.
Growth of a Dollar Invested in the S&P 500, January 1926–June 2016
We wrote the following in 2012, just before the presidential election: “In general, there is too much uncertainty and too many non-election variables that impact longer-term investment outcomes for us to see any value in positioning our portfolio for a particular election result. Different fiscal and monetary policies are likely to be implemented depending on who is president and which party controls the Senate. But there is a wide range of potential macro outcomes around either election result, stemming from the uncertainty related to policy implementation and the ultimate effectiveness in achieving desired results. Additionally, there are a multitude of other variables and factors unrelated to the election results that are out of a U.S. politicians’ control that are likely to have at least as meaningful an impact on the course of the global economy and financial markets over the next five years.”
Equity markets can help investors grow their assets, but investing is a long-term endeavor. Trying to make investment decisions based upon the outcome of presidential elections is unlikely to result in reliable excess returns for investors. At best, any positive outcome based on such a strategy will likely be the result of random luck. At worst, it can lead to costly mistakes. Accordingly, there is a strong case for investors to rely on patience and portfolio structure, rather than trying to outguess the market, in order to pursue investment returns.