The Stock Market and U.S. Presidential Elections
Politics and investment decision-making don’t mix very well. There’s a simple reason why: politics is usually filled with emotionally charged views and stubborn biases, neither of which have been known to serve investors well.
RSMA Wealth Management is committed to taking a fundamentally supported, long-term approach to how we manage money. Policies matter in determining economic outcomes, so we focus unilaterally on what parties and presidents do, not what they say. Unfortunately, today’s political climate tends to be more about the latter, and rhetoric escalating in ways that ultimately does not serve the public interest.
For this and a host of other reasons, many readers and Americans in general have grown disenchanted with presidential politics. The dark moment of an assassination attempt and the ongoing drama of the Democratic nominee for president may have only added to these frustrations.
But we think it’s important to keep a healthy distance between political sentiment and the investment decision-making process. Changing an asset allocation or getting out of the market for political reasons could mean paying a high opportunity cost. Case-in-point: from January 1, 2000 to December 31, 2023—a period that included a tech bubble, the 2008 Global Financial Crisis, the Covid-19 global pandemic, and surely a U.S. president (or two) readers found objectionable—the S&P 500 has annualized +7.02%, with an average return of +8.71%.
Thought of another way, $1,000,000 invested on January 1, 2000 would have finished 2023 with a balance of just over $5,000,000—despite everything that happened in between(i). Go back even further in history, and this is the picture that emerges:
In short, it’s certainly fine to be passionate about politics—just don’t let it spill over into the investment realm.
When it comes to U.S. presidential election years specifically, in the 30+ years I’ve been an investment manager there has always been investor sentiment that if candidate (fill in the blank) wins the election, it will be terrible for the stock market. But a look at past election year returns—as well as longer-term returns for U.S. stocks—demonstrates that such an outcome has never materialized. In the cases where we have seen post-election downturns, it has been tied to broader economic factors—not the election or re-election of a president.
Since the inception of a version of the S&P 500 in the 1920’s*, there have been 24 U.S. presidential elections. In 20 of them, the S&P Index registered positive total returns. In the four instances when the stock market fell (highlighted in yellow below), the U.S. economy was in the Great Depression, the early days of World War II, the 2000 tech bubble, and the 2008 Global Financial Crisis.
*The S&P 500 Index in its current form was created in 1957. However, as early as 1923, the Standard Statistics Company, which later became Standard & Poor's in 1941, created its first stock market index, which tracked the stocks of 233 US companies on a weekly basis. Three years later, the company developed a 90-stock index that was calculated daily.
Years when an incumbent is running for president have been particularly kind to the stock market. The average return since 1944 has been +15.8%, and the last time the stock market fell in a presidential re-election year was 1940(iii).
Conclusion
It is common in presidential election years for investors to assume their political party is better for the stock market. But history says the stock market has, on average, gone up regardless of who is in charge. The U.S. economy and stock market often march to a much different drumbeat than Capitol Hill.
RSMA Wealth Management strongly believes that over time the stock market responds more to long-term earnings and economic growth trends—not to changes in political leadership.
The emotional gravity of an election may make it seem like economic fortunes are on the line. But we believe this mindset puts far too much emphasis on political figures and policies, and far too little emphasis on the real engines of the U.S. economy – corporate earnings, small business growth, investment, the consumer, and innovation. Politicians come and go, but the engines of growth, innovation, and the pursuit of profit have remained constant over time. We don’t see this changing in this election cycle.
Sources
(i) Source: NYU Stern, Moneychimp CAGR calculater, S&P 500
(ii) Source: First Trust, “S&P 500 Index Returns in U.S. Presidential Election Years”
(iii) Source: Strategas Research, “Quarterly Review in Charts,” Q1 2024
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The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
The S&P 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
