Elections and the Stock Market: Much to Do About Nothing

It’s a presidential election year in the United States, and with that comes the invariable stock market correlations seeking to predict election results or forecast the market’s direction.  The performance of the stock market during the two months leading up to the election has historically been somewhat of a predictor of who will win the race in the US; moreover, we can also try to predict the direction of the market based on who wins the American election. While all of this makes for interesting and fun banter around the water cooler, thoughtful investors would be wise to leave their Ouija boards in the closet and stay focused on their long-term investment strategy.  As much as we would all like to glean even a small amount of investment insight from the election year follies, it would be important to note that the stock market is essentially non-partisan, and realistically American Presidents have very little long-term impact on the direction of the markets. 

The Stock Market as an Election Predictor

Admittedly, the stock market has been fairly successful at predicting the results of American Presidential elections. Since 1900, the performance of the stock market between July 31 and the American Election Day has correctly predicted the winner 88% of the time. 82% of the time when the market rallied between August and Election Day, the incumbent has won. 86% of the time when the market declined, the challenger won. That’s 25 out of 28 elections that the stock market has, in effect, predicted the American President.  That is pretty remarkable on its face, and if I were a betting person, I would have to consider those to be outstanding odds.

There is some logic behind this relationship, the idea being that a rising stock market is a reflection of the general belief by investors that the economy will be stronger in the months ahead. That gives American voters a confidence boost which, in turn, boosts the chances of a win for the sitting President. 

The Election as a Predictor of Market Direction

Each election year I am asked whether a win by either American party will be better for the stock market.  My instinctive response is, “I don’t know, and I don’t care.” Of course, I do try to explain in gentler terms that the market forces are much more powerful than any single person, even the President of the United States. With a slowing global economy and the possibility of increasing interest rates the market already has enough to absorb. Although, the uncertainty of who will lead the US for the next eight years is a contributing factor.  All told, there have only been three American election years of the last 21 in which the S&P 500 had a negative return. 

Is the Stock Market Pro-Republican or Pro-Democrat?

If we try to apply any logic to this, we would have to surmise that the stock market should perform better with a Republican in office. After all the markets like free-enterprise, lower taxes, and less regulation, right?

Try telling that to George W. Bush. The stock market lost 25% during his two terms as President. Of course, he had two recessions and two stock market crashes as bookends to his eight years in office.

Conversely, the best stock market performance under a two-term President was none other than Bill Clinton who actually increased taxes. It can be said though, that the stock market performed extremely well under Ronald Reagan, albeit for two down years (1^st and 7^th years of his presidency). But now, with Barack Obama, under whom taxes and regulations have increased significantly, of the last five Presidents, his first-term has seen the biggest four-year return, at 46.5%. Of course, his first term began just as the stock market hit bottom after the 2008 crash. 

The final tally shows that the best stock market performances in the last 30 years have come under Democratic presidents.  Yet, nothing they have done while in office can be remotely linked to the performance of the stock market.  

The Final Analysis:

The markets are random, but they do work regardless of who is in office in the US.  Principled and disciplined long-term investors don’t invest for an election cycle, they invest for a lifetime.

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