The Stock Market and the 2020 Election
Posted Sep 23, 2020
What is going to happen to the stock market if (fill in the blank) wins the election?
This is a question that I am getting more frequent as we near the 2020 Presidential election. I am not going to be getting into politics and discussing which candidate will be better for the country or the economy. What I will be discussing during this post is the history of Presidential elections and how they have affected the stock market both in the year of the election and subsequent years.
It’s hard to speak about Presidential elections without being political because the election is a political process, but the stock market is an amazing machine that does not necessarily care about the outcomes of elections. What the data shows is that despite which political party wins the election and holds office for the next 4 to 8 years, the market is extremely resilient at growing shareholder value.
Since 1928 the S&P 500 has averaged 11.3% growth during Presidential election years and 9.9% in the year after the election. We also see that volatility in the market has historically decreased during the 200 days surrounding the election.1Now, this does not mean that every election year the market goes up, but what it does show is that there is not a correlation between presidential candidates and the stock market. In fact, since 1928 there have been only 4 presidential elections years where the S&P 500 went down: 1932, 1940, 2000, 2008.
In 1932, Franklin D Roosevelt was elected President for the first time. This was during the middle of the Great Depression and the market experienced a -15.15% decline that year.2 1932 was in the middle of the Great Depression likely was a much bigger determining factor that year’s market performance than the election itself. It is important to note that in 1933 the S&P 500 increased 49.59% the year after FDR was elected President.
In 1940, World War II was raging in Europe and the United States was inching closer and closer to its involvement in the war. The S&P 500 declined in 1940 by -15.29% and another -17.86% in 1941.3 This could have been because FDR had just been elected to his 3rd term as President, but there were much bigger things happening throughout the world at that time.
In 2000, George W. Bush won the Presidency after a nail-biting election and Supreme Court decision (remember hanging chads?). The S&P 500 dropped -10.14% in 2000 and another -13.04% in 2001.4 This is surprising to a lot of people because Bush was regarded as a very business-friendly President. The common thinking is that Republicans pump up the market because of tax jobs and business-friendly policies. So, it’s counter-intuitive to think that the market would do poorly during these first two years. However, by the time George Bush took office, the dot.com bubble had been in full effect for more than 9 months. Entire internet companies vanished overnight, and many people’s portfolios were destroyed chasing the new hot trend (we will have to talk about that in another article). It is hard to place blame on the election or the newly sitting President for the market fallout after the dot.com bubble.
In 2008, Barrack Obama took over in a particularly poor market year. The S&P 500 was down -38.49% in 2008 but you cannot say that the cause of the poor market performance was due to the election.5 Everyone remembers that the economy had been in a full nosedive since early 2008 when the housing bubble burst, bank solvency came into serious question, and the world economy was on the verge of collapsing. The recovery since 2009 has been the longest bull market run in history and has returned multiples in value over the last decade for the investors.
It is easy to get caught up in the daily news cycle that monetizes fear and sensationalism. News is a business and every tv channel, newspaper, and website fights for your eyeballs so that they can generate advertising dollars. You should read the newspaper or watch the news to be an informed citizen, but you should not be using them for advice on investment decisions.
In conclusion, there is no supporting evidence that election years are any different than any other year when it comes to expected market returns and a US President’s political party seems to have no impact on stock market performance throughout history. The market is an extremely resilient wealth creation mechanism that rewards its investor for patience and discipline. Investing in the stock market is not the same as walking into a casino. While there are a lot of speculators that do gamble with short-term trades and some of them make money, a lot more of them lose money on bad bets. However, investing is a science and working with a fee-only fiduciary CFP® is a great way to know that you are getting a properly constructed portfolio that meets your goals.
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