It’s that time of the election cycle we all look forward to—non-stop robo calls and texts, not to mention TV ads. For investors, regardless of party affiliation, the bombardment of ads begs a question: Do elections make a difference in the outcome of the stock market?
After reviewing a number of articles, research reports, charts and data and even asking AI, the answer is…”maybe?”
If you can tie the current investment environment to a specific set of outcomes for the House, Senate and presidency you might be able to see some sort of connection to a potential outcome. Let’s do that in three ways:
- First, with respect to presidential elections.
- Second, with respect to party control of Congress and the presidency.
- Third, with respect to investors themselves—what happens if you make a specific investment change based on your point of view on an election outcome?
Of course, all three are subject to which data we review, and which to select is by no means obvious . And of course, history isn’t going to repeat … but let’s see if it might rhyme.
The data on presidential election cycles indicates some seasonality to returns on average. The stock returns twelve months prior to a presidential election, for example, are slightly lower on average than returns the year after an election. Using the returns from the S&P 500 Index for election periods since 1964, the return for stocks on average was 8.4% before the election and 9.3% the year after.
Party control of Congress and the presidency
Now focusing our attention on the actual outcome of the election, we see that party control is meaningful. The historical data going back to 1945 indicates the best potential outcome for the stock market is a split government. A few of those combinations stand out. What do you see?
If we believe one of these party-control outcomes is likely, and if we assume the rest of the economic environment would remain similar, what is the best thing to do with our money?
Here’s what a Capital Group study found, looking at three potential alternatives:
- Stay fully invested regardless of election outcome.
- Add to positions during the cycle via dollar-cost averaging.
- Sit in cash until the election is over.
As the chart indicates, sitting in cash trails the other two options. So, even if we’re uncomfortable politically, we may be best off staying with our investments.
No straightforward answers
Elections matter for many reasons, but for the stock market, the data doesn’t give us a clear direction. There seems to be some seasonality around the presidential election cycle, but it’s not a large disparity and, in any case, the years preceding and following presidential elections were positive. Party control seems to offer a clearer direction, but there are many economic confounders. And regardless, the data suggests that optimal investor decision-making is to stay invested (or mostly invested, with dollar-cost-averaging additions) throughout the cycle.
For me, the best answer is simply that there’s no one right answer for everyone. If you have concerns, take the opportunity to look at your investment allocation and financial plan with your advisor. As always—at any point of any cycle, political or economic—any changes must take into account your specific situation and viewpoint.