U.S. presidential election fever is in full force! Election years are often fueled by uncertainty about future policies, regulatory shifts and their potential impact on economies — and this year’s U.S. election has been no exception. While public policy can indeed influence specific industries, sectors and even the broader economic and social climate, the actual impact of the election may have less significance to the markets than many investors might expect. Here are three perspectives to consider:
1. Election year returns are similar to non-election years. Historical data shows that, since 1850, the annual compound return for a balanced 60/40 stock/bond portfolio invested in U.S. markets is similar in both election and non-election years. Election years (41 periods) have returned an average annual return of 8.7 percent, compared to 7.7 percent in non-election years (122 periods).1
Similarly, since 1950, the S&P 500 Index has averaged a return of 9.1 percent in an election year (“Year 4,” chart below), not significantly differing from the overall average of 8.8 percent. Interestingly, the 12 months preceding an election have exhibited the widest range of market outcomes compared to other times in an election cycle.
2. Markets are non-partisan. A common misconception is that one political party is better for market returns. However, historical data does not support this theory (chart). The S&P 500 has historically averaged positive returns under every partisan combination. Moreover, stronger market returns have been correlated with a divided government; some suggest that government gridlock may create less policy uncertainty.
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3. There are few consistent outcomes for sector returns in election years.2 While many investors are watching carefully to see how potential policy changes may impact the markets, sectors or even a company’s performance, consider that making changes to an investment strategy at this point comes with risks. Campaign promises do not always result in policy changes. Consider also that the success of policies depends on a variety of factors, including the composition of Congress or the Senate, economic and social conditions and many others.
The bottom line? Presidential election years often generate significant headlines, sometimes causing market volatility or tempting investors to adjust their investing programs. Yet, it’s important to distinguish between short-term noise and longer-term outcomes. As these perspectives highlight, the actual impact of an election may have less significance to the markets than many investors assume. Perhaps this is good food for thought for those of us nervously watching the outcome this November!
1. https://investor.vanguard.com/investor-resources-education/article/presidential-elections-matter-but-not-so-much-when-it-comes-to-your-investments;
2. https://fidelity.com/learning-center/trading-investing/election-market-impact
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