It’s that time again! Every four years, Americans take a few minutes out of their day to choose the next President of the United States. Under normal circumstances, voting is a simple, uncomplicated act—but the months preceding it are anything but. After all, before we vote, we first have to endure the dreaded “campaign season.” From endless televised debates to the plethora of signs on our neighbors’ lawns, “politics” becomes the order of the day.
If you’re like me, you probably don’t enjoy all the campaigning. But you also know how important the political process is. Being an informed, engaged citizen is crucial to maintaining the stability of our Republic. That means asking some pretty tough questions, like: “Which candidate best represents my opinions and values?” “What will each candidate do to ensure both our safety and our personal liberties?” Getting the answers can be both frustrating and time-consuming.
Fortunately, there’s one question you don’t have to ask.
“How will the election affect the markets?”
This is a question Iget every four years. This year, I thought I’d make life a little easier for you by answering it now. That means you have one less question to worry about!
So, how do elections affect the markets? The answer is:
Since 1957, the S&P 500 has gained an average of roughly 9.8% every presidential election year. Of course, there can be some massive exceptions. For example, in 1928, the S&P rose over 37%. In 2008, it fell over 38%.
But there’s a danger in using averages to try and predict what will happen. Take the “Presidential Election Cycle Theory” for instance. Once upon a time, many people believed that U.S. stock markets are always the weakest in the year following a presidential election. This was the case for Franklin Roosevelt. It also held true for Truman and Eisenhower.
But in George H.W. Bush’s first year, the S&P 500 rose 27%. In Bill Clinton’s first year, it rose 7%. Barack Obama’s first year saw a 23% rise. Donald Trump’s first year was 19%.
It’s clear that the “Presidential Election Cycle Theory” just doesn’t hold water. And that’s true for actual election years as well. An average merely shows you what has happened, not what’s going to happen. (Side note: this is why you often see the financial industry emphasize that “Past performance does not guarantee future results.” Because it’s true.)
“But what if the Democrats/Republicans win? Won’t that have an effect?”
That’s the next question I get every four years. My answer:
Don’t believe me? Let’s take a little quiz. Below are the last eight presidents of the United States, with their political party next to their name. (I’m skipping Ford as he took office in the middle of Nixon’s second term.) Look at each name and guess whether you think the S&P 500 went up or down during the first year of each president’s term. Write your guess in the space provided, if you like.
|President||Party||Markets Up or Down?|
|Richard Nixon (1st term)||Republican|
|Richard Nixon (2nd term)||Republican|
|Ronald Reagan (1st term)||Republican|
|Ronald Reagan (2nd term)||Republican|
|George H.W. Bush||Republican|
|Bill Clinton (1st term)||Democrat|
|Bill Clinton (2nd term)||Democrat|
|George W. Bush (1st term)||Republican|
|George W. Bush (2nd term)||Republican|
|Barack Obama (1st term)||Democrat|
|Barack Obama (2nd term)||Democrat|
Now, maybe you’ll score 100% on this quiz. But I’m willing to bet at least a few of the answers will surprise you. Speaking of which, here they are.
|President||Party||Markets Up or Down?|
|Richard Nixon (1st term)||Republican||-11.36%|
|Richard Nixon (2nd term)||Republican||-17.37%|
|Ronald Reagan (1st term)||Republican||-9.73%|
|Ronald Reagan (2nd term)||Republican||+26.33%|
|George H.W. Bush||Republican||+27.25%|
|Bill Clinton (1st term)||Democrat||+7.06%|
|Bill Clinton (2nd term)||Democrat||+31.01%|
|George W. Bush (1st term)||Republican||-13.04%|
|George W. Bush (2nd term)||Republican||+3.0%|
|Barack Obama (1st term)||Democrat||+23.45%|
|Barack Obama (2nd term)||Democrat||+29.6%|
If a hypothetical investor had followed the “Presidential Election Cycle Theory,” he or she would have missed out on some of the biggest gains in market history. The same is true if that hypothetical investor had made decisions based on politics. Convinced Democrats are terrible for the country? Fine, but have fun missing out on Clinton’s second term. Can’t stand Republicans? Okay, but too bad you didn’t catch the train between Reagan and the first Bush.
As worked up as we often get about our political beliefs, neither party tends to have that much impact on the markets compared to the other. Historically, the S&P 500 has gone up 10.8% under Democratic presidents, and 5.6% under Republican presidents. That’s not a large difference and can be attributed to a whole range of factors besides politics. Either way, the markets go up over time. That’s because the markets are driven by far more than just one person or event.
Obviously, it matters a great deal who our president is … but not when it comes to the markets. And that’s a good thing! Here’s why:
- The Founding Fathers created a system of government where no branch (executive, legislative, or judicial) was supposed to dominate the other. The fact that neither political party, nor election years in general, have that much influence on the markets shows that our system of checks and balances extends to investing, too.
- Again, the markets are driven by far more than just one person or event. They’re controlled by the ebb and tide of trade, by the law of supply and demand, by innovation and invention, by international conflict and consumer confidence. The markets are like life. The course our lives take isn’t determined by one gigantic decision, but by the millions of small decisions we make every day.
I don’t know about you, but I find that comforting.
So, what’s the takeaway from all this? The takeaway is that when it comes to investing, we control our own destinies, not politicians. The way to reaching your financial goals is by having a sound investment strategy, making informed decisions, and taking emotion out of investing. Not by worrying about the election.
So this year, as you watch the debates, chat amongst your friends, and decide who you want the next president to be, you can do so with the knowledge that whatever happens, the markets will go their own way … and so will you.