It’s probably no surprise that investors favor push and pull in Washington D.C. rather than one party writing and approving the laws, as the tension limits market uncertainty in terms of legislative risk.
Some of the best stock market years occurred during a split Congress. The stock market gained more than 30% in 1985, 2013, and 2019, all years when congressional control was split between Republican and Democrats.
And based on data from Natixis cited by Financial Times, the market rallied more when Congress was split than it did when a particular party held the presidency.
Source: LPL Financial, Bloomberg 06/30/20, Data are from 1950-2019, All indexes are unmanaged and cannot be invested into directly. Past performance is no guarantee of future results. The modern design of the S&P 500 stock index was first launched in 1957. Performance back to 1950 incorporates the performance of predecessor index, the S&P 90.
According to Natixis, since 1976, stocks delivered an average annualized return of 14.3% with a Democratic president, just higher than the average annualized return of 10.8% for a Republican president.
Both return figures based on which party occupies the presidency are lower than the average annual return of 17.2% delivered when Congress is split, suggesting that if investors are concerned about market implications of politics, they should focus more time on who wins the legislature than they do on who wins the presidency.
Meanwhile, presidential candidates have a big reason to care about the stock market – that’s because the stock market has correctly predicted who will win the presidency since 1984 according to Detrick.
And going back to 1928, the S&P 500 has correctly predicted the winner 87% of the time.
How can investors use the S&P 500 to better understand whether President Donald Trump or former Vice President Joe Biden is most likely to win the election on November 3?
By following the price movements of the market in the three months leading up to the election.
“When the S&P 500 has been higher the 3 months before the election, the incumbent party usually won, while when stocks were lower, the incumbent party usually lost,” said Detrick.
In 2016, very few expected Trump to beat Hillary Clinton — except for the stock market.
“The Dow had a 9-day losing streak directly ahead of the election, while copper (more of a President Trump infrastructure play) was up a record 14 days in a row, setting the stage for the change in party leadership in the White House,” Detrick said.
The three elections where the stock market incorrectly predicted the winner of the presidential election were:
- In 1956, when the incumbent, Dwight D. Eisenhower, was reelected despite the S&P 500 falling 3.2% in the three months before the election.
- In 1968, when the incumbent lost to Richard Nixon despite the S&P 500 rising 6% in the three months before the election.
- In 1980, when the incumbent lost to Ronald Reagan despite the S&P 500 rising 6.9% in the three months before the election.
Investors who are keen on presidential politics should keep a close eye on the stock market in the three months leading up to the November 3 election.
So, as we enter a new political season, I encourage you to have opinions. Express them. Get involved. Just remember that your financial decisions should stand on their own, free of any angst or worry that politics might cause. Don’t make important decisions based on which candidates you think will win or should win. Base them on sound financial planning and actual financial facts.
Most importantly, always remember that I am here if you have any questions or concerns.
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