Broker Check

Markets in a Minute: Election Returns: Electrifying or Uneventful?

Before starting on Wall Street, I worked for a number of years as a political analyst studying emerging markets. I followed news reports in Venezuela, parsed political speeches in Russia and analyzed currency policy in Turkey. And when these countries had presidential elections, times were especially fraught, for the outcomes under one candidate could vary widely from another.

 

As the US prepares for our next presidential election, I’m reminded of those days. But unlike then, I’m not all that worried about it, at least when it comes to investments. Unlike the emerging markets that I used to follow, a defining feature of the American political system is the strength of its institutions, which have provided enviable stability for nearly two hundred and fifty years. This strength allows investors to focus more on fundamentals such as company earnings and economic growth than who will be in office.

 

Here are the most important takeaways:

 

  • Election years tend to have similar returns as non-election years, but tend to be more volatile

 

  • There is little correlation between the party in office and the performance of the overall market

 

Politics and Consumer Confidence

 

That doesn’t mean, though, that individuals aren’t heavily influenced by politics. In fact, political affiliation profoundly shades how Americans view their economic situation. During the Reagan administration, for instance, Republicans reported consumer confidence nearly 20 points above Democrats. By contrast, during the Obama administration the spread was nearly 30 points with Democrats feeling more confident. As the White House changes control, individuals’ perceptions change quickly depending on how they voted.

 

Market Returns by President 

 

While the party or individual in office can shade perceptions, they rarely define the direction of the overall market once a new president is in place. Looking back to 1929, returns for the S&P 500 have varied widely from president to president and show little correlation by party. While the individual in office has an impact on certain policies and therefore particular companies and industries, that person doesn’t have a large influence on the overall market, especially in the short term as changes to things like tax policy or regulations take years to filter through the economy. 

 

Market Returns During an Election 

 

Where we do see a more pronounced effect is on the trend of the overall market in an election year as we move from great political uncertainty (which investors hate) early in the year to less political uncertainty (which investors prefer) once we get closer to the election. For instance, on average back to 1929, in the first quarter of presidential election years, the S&P 500 tends to be flat, underperforming relative to non-election years. This underperformance could be attributed to political uncertainty: in a typical election season, we begin the year with two primary races, often with a multitude of candidates and great uncertainty around who the presidential candidates might be.  

This year, though, doesn’t look typical. In the first quarter, the S&P 500 significantly outperformed both the election and non-election year average, ending up 10.5% at the end of the first quarter, versus the election year average of just 0.5%. While there are multiple fundamental reasons that explain the market’s behavior this year, there are also important differences in this year’s presidential race, providing more certainty for investors than any other race for the White House.  

  

We entered January with a high probability that Donald Trump would represent the Republican party and Joe Biden would represent the Democratic party. Not only have both these candidates run for the presidency before, they’ve also both served in the White House, a first in American history. This experience makes their future policies much easier to predict even if the candidates are quite different from each other. As a result, so far this year, the market has had the opportunity to look past politics toward the fundamentals that investors enjoy analyzing so much such as company earnings and economic growth. 

 

In the latter half of an election year, as political ads dominate the airwaves and sentiment polls abound, the good news for investors is that stock market returns are generally favorable, if erratic. On average, in the weeks before and after voters go to the polls, as the outcome becomes even more clear, stocks often rally, catching up with their non-election counterparts. Yet even as stocks rise generally, volatility also increases, making for a bumpy ride just before and after the actual election. In fact, in election years, volatility peaks well above non-election years and later in the year. Remarkably, returns in election years tend to be very similar to non-election years. 

 

 

The Bottom Line 

 

While politics and our candidates are incredibly important for certain policies, the impact that any one individual can have on the overall market is limited. For me, this is a good thing: America is not propelled by one individual just as it won’t be brought down by a single person because of the enduring strength of our institutions. That said, the election itself can influence the path of the broad market and introduce additional volatility, complicating matters for investors. That’s why this year it will be all the more important for investors to be guided not by short-term perceptions but instead their long-term goals and financial plan. 

 

Invest wisely and live richly, 

 

Kara 

 

 

 

 

 

 

 

The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Advisor Services Holdings C, Inc., d/b/a Kestra Holdings, and its subsidiaries, including, but not limited to, Kestra Advisory Services, LLC, Kestra Investment Services, LLC, and Bluespring Wealth Partners, LLC. The material is for informational purposes only. It represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. It is not guaranteed by any entity for accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was created to provide accurate and reliable information on the subjects covered but should not be regarded as a complete analysis of these subjects. It is not intended to provide specific legal, tax or other professional advice. The services of an appropriate professional should be sought regarding your individual situation. Kestra Advisor Services Holdings C, Inc., d/b/a Kestra Holdings, and its subsidiaries, including, but not limited to, Kestra Advisory Services, LLC, Kestra Investment Services, LLC, and Bluespring Wealth Partners, LLC. Does not offer tax or legal advice.