How Does the Stock Market Affect the Election? (And Vice Versa!)
With only a few weeks left until the 2020 presidential election, the stock market has been on a bumpy ride for the last several weeks. Typically, in election years, October tends to be a lackluster month as the country prepares for uncertainty related to a potential power shift. So far, however, October has been a strong month as talks of additional stimulus bolster consumer confidence. Strategas Research Partners says that we might be able to predict the next President based on how the stock market performs in the three months leading up to the election. If the S&P 500 is positive during that time, then the incumbent party wins. This has proven true since 1984. If the S&P 500 is instead negative during that time, then the opposing party wins. We won’t know the three-month performance leading up to the election (August, September, October) until the end of this month (so far, though, we’re on track for a positive performance).
In addition to the typical uncertainty caused by a presidential election, this year’s election may not be decided on election night because of so many mail-in ballots.
But it actually hasn’t been that long since something like that happened.
Let’s take a look at how the stock market performed the last time the election was undecided: in 2000 when President Bush ran against Vice President Al Gore. Voters in Florida used a punch-card system to vote, but it resulted in some ballots looking like a hole was only partially punched. Thus, the “hanging chad” drama ensued. That was November 7, 2000. It wasn’t until mid December that George Bush was declared the winner.
So what happened to the stock market in that time of uncertainty? The S&P 500 fell more than 8%, according to Fact Set. (Keep in mind, that we’re talking about a very small window of time, so it didn’t ruin anyone’s portfolio long-term, but it did provide a nice buying opportunity!)
Our in-house data wizard (Bridget) found that, since 1960, when the incumbent party wins the Presidential election, stocks typically return just over 1% in the six months following. When the challenging party wins, stocks actually perform a bit better with returns of 4%. After that, though, a win for the incumbent party means better performing stocks for the rest of the 4-year term!
So what tends to happen if:
The incumbent (President Trump) wins? Historically, the calendar year of the election is a positive year for stocks when the incumbent wins. BlackRock research found that in those years, between 1928 and 2019, stocks returned an average of 13.4%.
A new president (Joe Biden) wins? Historically, the stock market performs a little worse in the calendar year of a Presidential election when someone new is voted into the Oval Office. Black Rock found that stocks returned an average of 9.3% during those years.
It’s a Presidential Election Year in General? Stock performance falls in the middle - not as good as when an incumbent wins and not as bad (relatively speaking) as when a new president wins.
Note: These scenarios were researched by BlackRock using Morningstar data for the S&P 500 and the U.S. Large Cap Index.
Historically, the S&P 500 returns, on average, 7% per year, adjusted for inflation. So keep that stat in mind with these next facts!
Strategas Research Partners did some research on the best performing mix of House/Senate/Presidential party control. It turns out that the S&P 500 performed best (13.6% per year return on average) with a Democratic Senate and President and a Republican House. Strategas Research also found that the S&P 500 had an average annual return of 10.8% with a Republican President, Republican Senate and Democratic House (which is what we have right now). These stats don’t show causation, meaning they’re not meant to imply that the stock market performs this way as a result of who’s in power; rather, it can be seen as a correlation. In both of those scenarios, the S&P 500 outperformed its annual historical average.
This data isn’t meant to make you question your current investment portfolio. If you’ve been thinking about starting to invest, talk to a Certified Financial Trainer!
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