A Blog by Jonathan Low

 

Nov 3, 2020

How the Stock Market Usually Performs After A US Presidential Election

The market usually dips a bit - 1 to 1.5% - in the year after a new party takes power but that is almost always because the new party is cleaning up the mess the old party left which is probably a big reason why they lost. 

This may not be the case if Biden wins because the market is expecting him to launch an economic recovery package, while the Republicans are less likely to do so. JL

The Hustle reports:

Since 1964, 7 elections have resulted in the same party staying in power.The market was higher 3 months after the election in all 7 of these instances, with an average gain of +5.7%. By the 1 year mark, all but one election (Nixon, 1972) saw gains...the average gain was +14.4%. Looking at the same data, the sitting party has also lost 7 presidential elections -- and a shift in party typically comes with a negative short-term market result.A White House flip sees an average decline of -1.5% after 3 months. A year out, the market has been down in 4 of 7 of these instances, with an average dip of -1.0%.

How does the S&P 500 perform after a US presidential election?

When it comes to the stock market, one of the best ways to get a sense of what the future holds is to look to the past.

To do so, The Hustle teamed up with Toggle AI -- an analytics firm that provides insights to both hedge funds and retail investors -- to analyze the S&P 500 index across 14 prior elections dating back to 1964.

Here’s how the index performs after 2 presidential election-related scenarios: 1) the incumbent party wins; and 2) a new party takes power.

To be sure, the election outcome is one of many factors that drives stock performance. This analysis will keep a narrow focus.

Incumbent party stays = double-digit stock gains 1 year after

Since 1964, 7 elections have resulted in the same party staying in power.

The market was higher 3 months after the election in all 7 of these instances, with an average gain of +5.7%. By the 1 year mark, all but one election (Nixon, 1972) saw gains...the average gain was +14.4%.

One caveat to keep in mind is that a solid economy is often a positive tailwind for a presidential re-election bid -- so a case could be made that the market is set up favorably for the incumbent president (and, secondarily, his/her party).

New party in power = stocks down slightly 1 year after

Looking back at the same data (1964 to present), the sitting party has also lost 7 presidential elections -- and a shift in party typically comes with a negative short-term market result.

A White House flip sees an average decline of -1.5% after 3 months. A year out, the market has been down in 4 of 7 of these instances, with an average dip of -1.0%.

Of course, what we’ve presented here is based on a small sample size.

Previous results can provide context. But as is oft-noted in the investment community, past performance is not a guarantee of future results.

All elections have something that makes them stand out…

… '64, '68, and '72 were colored by the Vietnam War, riots, and political assassinations; '00 and '08 came during financial crises; '04 was during the Iraq War.

However, this election cycle is particularly strange and unpredictable. We're in the middle of an international pandemic, a misinformation war, and the worst economic downturn since the Great Depression.

This data doesn't mean that the reelection of our current president would be better for the market. But it still provides some interesting historical perspective.

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