Every four years, the world waits in anticipation as the American people head to the polls and vote for their preferred presidential candidate. Each time, the consequences are far-reaching, impacting America’s foreign and domestic policies, her standing on the world stage, and the economy as a whole. But what about the stock market? Should you be worried about your investments, which likely represent years of hard work and diligent savings?
Well, what does history show us?
Election Year Market Movements
A sound indicator of stock market performance is the S&P 500, which tracks 500 of the largest American companies represented on the stock market. Looking all the way back to 1928, we can see that there have only been four years of negative returns during an election year.
Historical U.S. Presidential Election Results & S&P 500 Returns
|
Election Year
|
President Elected
|
S&P 500 Returns
|
|---|---|---|
|
2016
|
Trump
|
12%
|
|
2012
|
Obama
|
16%
|
|
2008
|
Obama
|
-37%
|
|
2004
|
Bush W.
|
10.9%
|
|
2000
|
Bush W.
|
-9.1%
|
|
1996
|
Clinton
|
23.1%
|
|
1992
|
Clinton
|
7.7%
|
|
1988
|
Bush H.W.
|
16.8%
|
|
1984
|
Reagan
|
6.3%
|
|
1980
|
Reagan
|
32.4%
|
|
1976
|
Carter
|
23.8%
|
|
1972
|
Nixon
|
19.0%
|
|
1968
|
Nixon
|
11.1%
|
|
1964
|
Johnson
|
16.5%
|
|
1960
|
Kennedy
|
0.5%
|
|
1956
|
Eisenhower
|
6.6%
|
|
1952
|
Eisenhower
|
18.4%
|
|
1948
|
Truman
|
5.5%
|
|
1944
|
Roosevelt
|
19.8%
|
|
1940
|
Roosevelt
|
-9.8%
|
|
1936
|
Roosevelt
|
33.9%
|
|
1932
|
Roosevelt
|
-8.2%
|
|
1928
|
Hoover
|
43.6%
|
Let’s take a closer look at those four years of negative returns and what was happening at the time:
1932 – The Great Depression
1940 – WW2
2000 – Dot-Com Bubble
2008 – Financial Crisis
So, were the markets so volatile in those years because of the election, or did other events influence the markets more than the election? I’m guessing the latter. Considering 83% of election years had overall positive returns, it doesn’t make much sense to withdraw funds now and buy back after the election.
Zooming in on the election month itself (and those surrounding it, October and December), we see that while there is greater volatility, it doesn’t have much of an effect on the performance of the S&P 500. In any case, the markets usually recover by December.
Average S&P 500 Performance Around Presidential Elections
Post-election Year
All of this may be a moot point if the new President comes in and wreaks havoc on the economy and stock market. So, you may be instead worried about what will happen to the markets the year after the election in the first year of the President’s term (or the first year of their second term). Again, history shows us that there is no need to panic.
The S&P 500 is more likely to have a negative return during the first year of a presidency than an election year itself. However, since the 1940s, you’re much more likely to experience a positive return, and those returns tend to be much more significant than losing years.
Winning Years:
In 1945: 30.70%.
In 1981: 25.80%.
In 1989: 27.30%.
In 1997: 31.00%.
In 2009: 23.50%.
In 2013: 29.60%.
In 2017: 19.40%.
In 2021: 26.90%.
Losing Years:
In 1953: -6.60%.
In 1957: -14.30%.
In 1973: -17.40%.
In 1977: -11.50%.
In 1981: -9.70%.
In 2001: -13.00%.
Besides these potentially astounding results, you’re also likely to have decent results. Since 1944, the S&P 500 has averaged 6.2% in the first presidential year, a bit lower than the general average of 8.6% over the same time period. Not stellar results, but nothing you would want to miss, either.
Also, to reduce your anxieties even further, let’s remember that your portfolio likely isn’t comprised solely of American stocks but also international stocks, bonds, and maybe even gold and real estate; therefore, American election volatility won’t affect your portfolio as much as it otherwise would.
What Are Your Options?
Let’s look at some potential scenarios:
- Sell now.
- Sell at election time.
- Stay the Course.
As for the first two points, there’s no guarantee that prices will be lower whenever you decide to buy back in. And if your preferred candidate doesn’t win, will you wait another four years to buy back in and lose all of that investing time?
Even if the markets do go down, your stocks, ETFs, and mutual funds will still generate dividends, limiting the impact of any losses. Looking at the 2000s, the S&P 500 experienced a total negative return. However, once factoring in dividends, it had a 1.8% annualized return over the decade.
By staying invested, you won’t miss out on any stock market rallies vital for long-term growth. Missing just ten of the best market days can result in giving up more than 50% of potential profits over 20 years! Of course, missing the worst days could help, but just like the best days, you never know when the worst days will occur.
Instead, what makes more sense is to trust the process of dollar-cost averaging, diversification, portfolio rebalancing, and staying the course.
And trust your financial advisor.
Most investing mistakes occur due to psychological factors. And that’s natural – your savings, your retirement, and your legacy are at stake when it comes to investing. However, it also clouds your judgment. A fiduciary financial advisor can help clear the distractions, eliminate the constant noise and fearmongering we’re bombarded with daily, and keep your portfolio on course for long-term success.
Final Thoughts
The President plays an enormous role in the economy; there’s no doubt about that. However, election season seems to have surprisingly little effect on the stock market’s overall performance. And what choice do we have? Trying to predict the stock market often ends in failure (or at least diminished returns), and with our life savings at risk, it’s not a risk we’re willing to make.
To help ensure your portfolio is on track for long-term success, click the button below. With a cool-headed advisor by your side, you won’t have any reason to fear this election season. Instead, you’ll have the confidence and expertise needed to stay the course and build your wealth.
