Investing in a Presidential Election Year

Elections tend to be significant events in the United States, with Presidential elections carrying particular importance. The person who sits behind the Resolute Desk in the Oval Office is expected to hold outsized influence over many political, social, and economic issues during their term.

This year’s Presidential election has been touted by many as the most significant of our time, and its outcome seems as uncertain as any in the past. For investors, the election’s potential impact on the stock market is top-of-mind. Given the heightened sense of both significance and uncertainty, what’s an investor to do?

The future is impossible to predict. Every election and administration are unique, each presenting its own circumstances for investors to grapple with. However, insights can be gained by studying the past—as Mark Twain said, history doesn’t always repeat itself, but it often rhymes.

The small sample size for “modern” elections and administrations that are reasonably comparable to today is limiting. Nonetheless, a detailed examination of historic market performance throughout past elections and administrations contains revealing observations for investors today.

Most importantly, a review of the past reveals no obvious pattern in U.S. stock market returns with respect to Presidential elections and changing of administrations.

Market Returns by Presidential Administration

When considering how Presidents may influence the stock market, the natural place to start is examining returns in past administrations. The chart below shows the average annual returns of the U.S. stock market by President since 1961. Republicans are colored in red and Democrats in blue.

Source: Dimensional Fund Advisors LP. Data reflect CRSP deciles 1-10 total returns as proxy for total U.S. stock market. Bars represent average annual market return beginning in first full month of each administration. Data are through 3/31/2024.

As the chart shows, market performance has been mostly agnostic to the political party of Presidents. The average annual return has been 13% under a Democrat President versus 10% under a Republican—both quite good, by any reasonable measure.

It’s notable that the average return under Republican Presidents is pulled down by negative returns during the administrations of Richard Nixon and George W. Bush, both of whom experienced significant bear markets associated with economic recessions that occurred at the end of their respective tenures. These downturns appear to have little to do with party politics: the decline in 1973-74 was brought on by the OPEC oil embargo and the crash in 2008-09 was the result of the Great Financial Crisis.

The same holds true in most cases if we flip the script and look at administrations with positive returns—the impact of party politics seems to fall below other explanations for market performance such as increases in productivity, population, and economic growth. Abandoning stock market investments at the onset of a new administration out of political fear would have cost investors dearly in most cases.

Moreover, nearly every administration experienced some tumult along the way. The chart below adds stock market returns for monthly rolling 12-month periods throughout each administration, with each 12-month period represented by a gray dot.

Source: Dimensional Fund Advisors LP. Data reflect CRSP deciles 1-10 total returns as proxy for total U.S. stock market. Bars represent average annual market return beginning in first full month of each administration. Dots are overlapping 12-month periods of trailing returns on a monthly rolling basis, representing only time periods in which the administration was in power (time periods that capture two different administrations are excluded). Data are through 3/31/2024.

While most administrations ended with sizeable positive average returns, the variability throughout each President’s tenure is remarkable. Each President presided over a 12-month period of 30% market returns and most administrations experienced a 12-month period of 10% decline. Investors who exhibited discipline and maintained their investments during these turbulent times were rewarded.

The bottom line is that there is no discernable pattern between the political party of the President and market returns.

Market Returns by Control of Government

People may expect the President to hold outsized influence over important issues, but the structure of our republic limits what a single President can achieve through checks and balances with Congress. This means the President and Congress must cooperate to pass meaningful legislation.

For those with strong partisan beliefs, it may stand to reason that better market outcomes would occur when the Federal government is united under their party of choice. Conversely, partisans might expect markets to perform worse when unanimous control is held by the opposing party.

The chart below shows the average annual returns of the U.S. stock market by party composition of the Federal Government since 1961. Parties are again coded in blue for Democrat and red for Republican—the President is represented by the outline of the bar, and the composition of Congress is represented by the fill within each bar.

*Bear markets occurred on two occasions during times when the D Congress, R President arrangement was in place: once during the 93rd Congress (1973-1975) and once during the 110th Congress (2007-2009).
Source: Dimensional Fund Advisors LP; History, Art & Archives, United States House of Representatives. “R” stands for Republican control and “D” stands for Democrat control. Data reflect CRSP deciles 1-10 total returns as proxy for total U.S. stock market. Bars represent average annual market return beginning in first full month of when each arrangement of party government began. 2001-2002 are excluded due to fluctuations in Senate control due to switching parties and deaths that shifted balance throughout the term. Data are through 3/31/2024.

While all compositions of government have yielded positive returns, the average annual return under divided government (14.6%) has been higher than that of unified government (13.7%). It’s worth noting the impact of the bear markets discussed above on this chart as well—the downturns in 1973-74 and 2008-2009 both occurred with a Republican President and Democrat Congress, represented within the bar on the left, dragging down the overall average for divided government which would have been much higher otherwise.

So, the evidence fails to support the argument that unchecked policies of a single party result in better outcomes than otherwise. Inasmuch as returns are influenced by the composition of government (which, again, appears to fall low on the list compared to other factors), it seems markets may favor the friction of division over the mandate of unified government under any one party.

Market Returns in Presidential Election Years vs. Others

Finally, partisans and nonpartisans alike are often concerned about how markets perform around Presidential elections versus years without a Presidential race on the ballot.

The time leading up to electing a President is often riddled with uncertainty surrounding who might win, and the period immediately following the vote is spent processing the results and sorting out expectations as to what might happen next. Given the significance and uncertainty that elections and potential new administrations carry, some investors question whether it’s best to “sit out” during these times.

The following chart examines U.S. stock market performance during the three months before and after elections (August to January) from 1960 to today, represented by the growth of $1.00 invested. Years in which a Presidential election took place are represented in light purple, and years when a Presidential race was not on the ballot are in light green. The averages for each from 1960 to now are represented by the darker lines.

Source: Dimensional Fund Advisors LP. Data reflect CRSP deciles 1-10 total returns as proxy for total U.S. stock market. “Election year” data represent the beginning of August immediately prior to a presidential election through the end of January immediately after. “Non-election year” data represent the same time span for years in which presidential elections did not take place.

Average market returns during the three months before and after a Presidential election have been similar to those of the same timeframe in years without a Presidential race, with Presidential election years actually performing slightly higher on average than other years. The performance for most years falls within a reasonable band, except for a few outliers.

The stock market in the short-term is unpredictable and rarely moves in a straight line. But over the long-term, the market has continued to reward those who have remained committed to a disciplined long-term investment strategy through both calm and uneasy times.

Maintaining Discipline in the Face of Uncertainty

Elections are important, and electing a President carries a degree of significance which can lead to people feeling the need to act in investment portfolios. But, despite the heightened uncertainty associated with this year’s election, one can see from an examination of the past that there is no discernable pattern in market returns with respect to Presidential elections and administrations.

At Alesco Advisors, we acknowledge uncertainty as being an inherent part of investing. Our investment team constructs custom client portfolios that are intended to weather a variety of market environments precisely because we know that short-term conditions are impossible to predict. We make necessary adjustments to our portfolios based on substantiated data and valuations, not transient market events or unreliable forecasts.

This philosophy, rooted in deep analysis and supported by volumes of research, serves to maintain stability and navigate the complexities of markets over time. We believe this practice is the best way to give our clients the highest probability of achieving their long-term investment goals.

The content in this blog post is provided for informational purposes only, and should not be construed as personalized investment advice. Past performance is not indicative of future results. The data and information used in the preparation of this blog post are obtained from third-party sources believed to be reliable, but Alesco Advisors does not guarantee the accuracy, completeness, or timeliness of the data and information.