As the Presidential election campaign enters its final stages, there is a growing sense of anxiety among investors about the potential impact the election might have on the stock market. What can history tell us about stock market returns during and after a Presidential election?
As is often the case, investor concerns surrounding the election are magnified by the amount of news coverage (and campaign messages) involved. Despite the heightened anxiety, returns during election years tend to be pretty good. According to a recent paper published by investment firm MFS, the average return for the Dow Jones Industrial Average Index during an election year is 7.4%. If the incumbent party wins, the index averages a 14.6% gain. However, if the incumbent party loses, the market has declined by an average of -4.4%. The market has tended to favor a Republican win with an average gain of 10.3% versus a 4.2% gain if the Democratic candidate wins.
Once the election has been decided, market returns in the latter years of the four-year Presidential term tend to outperform the early years. According to the Stock Traders Almanac, since 1833, the Dow Jones industrial average has averaged gains of 2.5% and 4.2% for the first and second years of a Presidential term and then accelerates to average gains of 10.4% and 6% for the third and fourth years. Stock market returns have been a little better with a Democratic President in the White House, with an average gain of 9% per year for Democratic Presidents versus 6% for Republicans.
No matter the outcome, we do not think investors need to worry about the election in November. The President alone, whomever that may be, can only do so much on their own. To implement major policy changes, they will need the support of the Senate and the House of Representatives, the members of which have their own agendas and constituents to whom they must answer. By design, future changes to policy will occur only slowly and methodically.
So, for long-term investors, the coming election shouldn’t necessitate any action. We view this as part of the normal ebb and flow of market and political cycles. Over the long-term, markets tend to go higher no matter who is in charge.
If you would like to discuss our opinions, outlook, or your portfolio in greater detail, we would be happy to schedule a meeting or a conference call at your convenience.
If you’d like to read more about the relationship between the Presidential election cycle and the stock market please see the following articles: