How Do Stocks Perform in Presidential Election Years?
This election season is shaping up to be one of the most unusual presidential races we have seen in a long time. With the election a little under 75 days to go (only 75 more days of political ads!) it seems to be a daily occurrence someone wants to know how this election will impact their investments. My crystal ball has proven to be defective for sometime so I refer back to the history books to see if we can glean any insights into how stocks might react.
Stocks have generally had positive results leading up to presidential election periods but did not beat returns from non-election periods. We will break this into how stocks perform in the weeks and months prior to election day and how they perform after the votes are cast. We will use the S&P 500 index as our proxy for the US market. Our data starts in 1950 so we’ll begin with the 1952 presidential election. Our apologies to Harry S. Truman!
Stocks prior to the election show split results. In the week prior to election day shares actually outperform non-election year markets by about 0.4%. The markets are positive over 87% of the time in the week leading up to selecting a president. The top performing year was 2008 (6.9%) with the worst performing year of 1988 (-1.4%). Returns turn less sunny when you go out 30, 60 and 90 days before election day. Only 56% of the time do markets have a positive result. You can see in the chart below that stocks in general have seen modest gains but don’t keep pace with non election years.
Investors appear to have an election day hangover (political ad and robo call withdrawal?). Returns in the short term are pretty soft following our trips to the polls. Presidential election years see about a 1% average under performance relative to all years. In the first week after stocks are only positive 44% of the time! The worst years also look pretty bad with the financial crisis.
The schlep of poor return carries on beyond the first year as well. Stocks struggle 1, 3 and 5 years to keep pace with normal market years. There are some one off events that took place in election years which skew the results (2008 financial crisis) but removing them from the data set still leads to suboptimal results.
Bottom line is history is not on your side, but that does not mean it will repeat itself. The period after the 1996 election was terrific for stock investors. This definitely does not mean you should change your investment allocation because of our look back at history. There are a lot of factors that go into elections, the markets and economic cycles.