Disclaimer: The findings in this article are purely data-driven and do not serve as investment advice.
Every four years, the United States presidential election brings with it a swirl of uncertainty, not just for voters, but for investors as well.
As election day approaches, the potential for significant policy shifts and the overall direction of the country become major points of speculation, often causing increased volatility in the financial markets. This year is no exception, given the move by a sitting president to withdraw from the race.
To provide a clearer picture of how presidential elections have influenced the stock market, we’ve analyzed historical data spanning several decades.
In this article, we’ll answer common questions about how presidential elections impact the stock market, and provide insights that can help guide your investment strategy. However, the findings in this article are purely data-driven and do not serve as investment advice.
Q: How Have Markets Performed Under Various Presidents?
Dating back to John F. Kennedy’s inauguration in 1961, the S&P 500 posted a negative return during only two presidencies: Richard Nixon and George W. Bush.
Richard Nixon (1969-1974): Nixon’s term faced significant economic challenges, including high inflation and the end of the Bretton Woods system. The Watergate scandal further contributed to market instability. The combination of these factors contributed to the negative return for the S&P 500 during his presidency.
George W. Bush (2001-2009): Bush’s presidency was marked by two major crises: the bursting of the dot-com bubble and the global financial crisis of 2008. The S&P 500’s negative performance during this period reflects the impact of these severe economic disruptions.
By contrast, other presidencies, such as those of Ronald Reagan and Barack Obama, generally saw positive returns for the S&P 500. Reagan’s term benefited from strong economic growth and market reforms, while Obama’s presidency experienced a significant market recovery after the initial downturn.
Q: How Would Your Investments Perform if You Only Invested During Presidencies of One Political Party?
Making major investment decisions based on a president’s political party – i.e. being invested only during Republican presidencies, then moving to cash for Democratic presidencies, or vice versa – can be a risky and counterproductive strategy. This approach may result in missed opportunities and suboptimal portfolio performance.
| S&P 500 Investment During Only Republican Presidencies since 1950 | 2.79% Annualized Return |
| S&P 500 Investment During Only Democratic Presidencies since 1950 | 5.15% Annualized Return |
| S&P 500 Investment During All Presidencies | 8.08% Annualized Return |
The key takeaway here is that basing investment decisions solely on the political party of the president does not necessarily lead to superior returns. Markets are influenced by a wide range of factors, including economic policies, global events, and market cycles, which are not solely dictated by the president’s political party.
Regardless of the party occupying the Oval Office, staying invested and focusing on a well-diversified portfolio is the most prudent long-term strategy.
Related: How to Set Investing Goals
Q: How Volatile Are Markets Leading Up to and After an Election?
Investor anxiety has generally risen leading up to Election Day in the last eight cycles. This heightened volatility is closely monitored by financial professionals, and the CBOE Volatility Index (VIX), commonly known as the “fear gauge,” provides a useful measure of this uncertainty.
However, volatility often cools down once the election is over and in the roughly two-month period leading up to Inauguration Day.
Q: What is the Impact of Moving to Cash During Presidential Election Years?
Just as making investment decisions based on a preferred political party can negatively impact portfolios, pulling investments out of the market and moving to cash during election years can be equally detrimental.
| S&P 500 Investment During Only Non-Election Years Since 1950(moving to cash during election years) | 6.34% Annualized Return |
| S&P 500 Full Investment Since 1950 | 8.08% Annualized Return |
Reasons Why Moving to Cash Can Be Detrimental
- Missing Out on Market Gains: Historically, markets have rebounded and performed well after periods of volatility, including during and immediately after election years.
- Timing the Market is Challenging: Investors who try to avoid potential losses by moving to cash during uncertain times often struggle to re-enter the market at the “right” time.
- Increased Short-Term Volatility: Short-term volatility is a part of the market cycle, and staying invested through these fluctuations can be more beneficial than attempting to time market exits and re-entries.
- Opportunity Cost: Cash typically yields lower returns compared to equities. The opportunity cost of holding cash instead of being invested in the stock market can be substantial. Over time, this can significantly impact the growth of your portfolio.
Despite short-term volatility in election years, remaining invested for the long-term is the most prudent strategy.
Q: How Does the Market React After Elections?
Of the 18 presidential election years since 1952, 9 of them saw the market turn positive on the first trading day following Election Day.
The average of -0.23% was heavily influenced by the 2008 and 2012 elections, where the S&P 500 logged one-day returns of -5.27% and -2.37%, respectively.
Markets turned higher in the last two elections, greeting the prospects of a Biden presidency in 2020 with more enthusiasm than Trump’s electoral victory in 2016. However, the post-election period generally produced higher returns, as the S&P 500 was positive during the roughly two-month period leading up to inauguration day for 11 of the last 18 elections.
Q: How Does the Market React When an Incumbent President is Re-Elected? What About When the Challenger Wins?
In most cases, the S&P 500 posted positive returns between election day and inauguration day, regardless of who wins the presidency.
Since 1952, Democratic presidents winning reelection has historically led to the most significant S&P 500 returns in this post-election period. However, lower returns have tended to occur when the winning candidate was neither an incumbent nor a challenger, such as in election cycles that replace a termed-out president.
As of July 21, 2024, the 2024 election falls into the “Neither” category; historically, these have produced the lower pre-inauguration returns, especially if a Democratic candidate is elected.
Q: How Does One-Party Control or a Divided Congress Impact Market Returns?
Historically, higher average annualized returns have occurred during a divided congress, where one party controls the House or Senate and the other party holds a majority in the second chamber. Lower returns have come during Democratic majorities in both the House and Senate, while higher returns have taken place under Republican control of both congressional chambers. In any case, the market has historically been positive under all six government compositions.
Under the current government of Democratic president and divided Congress, the S&P 500 has advanced 42.22% (26.55% annualized) between January 3, 2023 – when this current Congress was sworn in – and June 30, 2024, outperforming the 15.72% annualized return historically generated during this legislative formation.
Q: How Did Asset Classes Perform Under the Last Two Presidents?
Equities have performed considerably well under both presidents, with the exception of Emerging Markets (EM). EM rose 72.1% during Trump’s presidency, but has fallen 14.1% through Q2 2024 of Biden’s tenure. Bond indices also advanced under Trump but have slipped during Biden’s presidency thus far. Commodities were the worst performing and only negative asset class under Trump, but have performed the best under Biden.
The parties occupying the White House and Legislature are just one of many variables that can affect investments. For example, the 2008 Financial Crisis created systematic risk for Presidents Bush and Obama, while the global pandemic in 2020 impacted the market beyond the control of Presidents Trump and Biden.
While elections may create some short-term uncertainty, focusing on long-term investing goals should always be the most important factor in investment decision-making.