Presidential Elections And Stock Market Returns
To say the least, this year's US Presidential election has been unsettling and extremely polarizing. Partisan rancor has the nation divided, and cautious investors are concerned about how their portfolios will fare depending on who occupies the White House in January.
With this in mind, we thought it would be interesting to investigate historical stock market performance through a political lens.
Many analysts, particularly Democratic ones, are quick to point out that historically, Democratic presidents have been better for the stock market. For example, since 1945, US stocks as measured by the S&P 500 have increased 9.7% per year under Democratic presidents, and only 6.7% under Republicans.
By the same token, Republicans point out that a Republication Congress has been historically better for stocks, regardless of who controls the White House. The same research shows that since 1950, stocks experienced an annual return of 15% during the years when both houses were Republican. Blending the two, returns were over 11% when the White House was Blue and Congress remained Red. So, if Wall Street roots for anything, politically speaking, it might just be divided government.
"... these speculations carry about as much predictive value as using the winner of the Super Bowl to forecast inflation, or annual rainfall to guess the gender of your next grand baby. "
At present, oddsmakers and national polls heavily favor a Presidential win for the Democrats, and a tight race is under-weigh for control of the US Senate. So, what action should investors take given the current political climate?
Our answer: None.
While it is certainly entertaining to opine about short-term market moves based on the upcoming election, these speculations carry about as much predictive value as using the winner of the Super Bowl to forecast inflation, or annual rainfall to predict the gender of your next grand baby. Of course, this will not stop a steady stream of news articles and very concerned pundits from flooding the airwaves between now and November 8th, warning investors that they should do something. But, the simple reality is that over the long run, the market has provided substantial returns, regardless of who controlled the executive or judicial branches of our government. The stock market is governed by a highly variable and complex set of factors that go far beyond politics -- not least being the business cycle and economic fundamentals such as valuation, earnings growth, and consumer demand.
Equity markets have a strong history of rewarding patient investors, but successful investing is a long term endeavor. Trying to make investment decisions based on a presidential election is unlikely to generate sufficient excess returns over time, and is more likely to diminish them. More important than forecasting short-term market moves, investors should rely on portfolio structure and patience, rather than trying to outguess the market or predict the future.
Sources: Standard & Poors, CNN Research.