How the Stock Market Performs in Election Years

Whether it’s an election year or not, the stock market doesn’t like uncertainty. Unfortunately, in a highly charged election year like this one, uncertainty is the only sure thing we can count on.

In the 22 election years since 1928, the United States has experienced 18 positive returns and only four negative returns. One interesting factor is whether or not an incumbent president is seeking re-election. When this happens, the market atmosphere is less volatile because one known entity is considered less disruptive than two unknowns. Historically, the S&P 500 averaged about 12.6 percent in those years. The first year when an incumbent wins re-election also tends to be positive.

However, when the sitting president is not up for re-election, the S&P has dropped an average of 2.8 percent during an election year. The stock market also has a history of trending downward in the first year that a new party takes over the White House.

Another contributing variable is what party is in control of Congress during a presidential election year. When Republicans control Congress, as they do now, the S&P 500 averaged 19.7 percent. In years when Democrats controlled the legislature, the S&P averaged 3.2 percent. In years when the factions split control, the market earned an average 7.6 percent.

The party that takes over the Administration can also have a direct impact on sector performance. For example, healthcare companies are poised for more profits if the Democrat candidate wins, since she supports the current Obamacare legislation. However, if the reform law is repealed by a Republican president, the healthcare industry may slide.

On the other hand, the current Republican candidate supports higher import tariffs, which could make some products more expensive and possibly reduce profits and stock prices. However, if he were to successfully lower income taxes that could encourage more spending in the consumer discretionary sector.

As for the duration of a presidential term, you might think the stock market would perform best under a Republican president, since the GOP favors the free market capitalist system. However, since World War II, the Dow Jones Industrial Average Index has posted greater average returns under Democrat presidents.

One market analyst has even posited a theory that stock market performance can actually predict the outcome of a presidential election. His hypothesis states that if the stock market posts gains in the three-month run-up to Election Day, the candidate from the incumbent political party is likely to win. If the stock market falls during the three months before the election, the new party is more likely to win.

Clearly, politics can influence stock market performance. However, it’s never a good idea to make investment decisions based on election predictions alone. As for the consistency of historical returns during different party regimes, bear in mind that past performance is not an indicator of future results, and certainly not given all the variables in today’s global economy. What is most important is that investors stay focused on financial goals and maintain a portfolio designed to meet those goals.

The commentary above is general in nature and is not intended to replace advice from expert tax and investment professionals.