We often get questions around stock market performance in election years. There are many books and theories published around the correlation between election cycles and stock market cycles. Is it true that the stock market outperforms in an election year? We are here to debunk (or not) myths and share some facts.
An easy way to offend an audience of readers is to discuss politics in an election year. Many of us are passionate about our candidates. We all have opinions. So let’s put our political differences aside and focus on who the stock market favors as our next President.
Clarity is Key
We all want clarity. The more uncertainty there is, the more difficult it is to value a publicly traded company. Heading into the election, this is what investors and business leaders want to know:
- Taxes. Will the Tax Cuts and Jobs Act be repealed, causing tax rates to increase?
- Employment. Will there be new job growth?
- Coronavirus. What will be the long-term economic impact?
- Healthcare. Will the Affordable Care Act be around?
- Fiscal Spending. How high will our debt ceiling climb?
- Interest Rates. Will fiscal easing continue to keep interest rates low?
The answers to these questions will likely impact the stock market. However, the answers will not come the day after the election. Policy changes and their impact are felt over a more extended period of time.
Does the stock market care who is President?
Let’s find out. One thing we do know is the stock market influences whether a sitting president or a given political party can keep the White House. Recent history indicates that a weak economy combined with a down stock market will generally call for a change.
- 1992 (S&P 500 Index +7.6%): The struggling economy brought the Democrats and Bill Clinton into the White House. During his first four-year term, we began our most infamous bubble, the dot-com bubble, in 1994.
- 1996 (S&P 500 Index +23%): The booming internet stocks carried Clinton into a second term, where the bubble finally burst in 2000. The White House would again turnover due to the poor economic conditions.
- 2000 (S&P 500 Index -9.1%): The Republicans won the next election with George W. Bush. He inherited the busted internet bubble. Then, less than one year into office, 9/11 occurred.
- 2004 (S&P 500 Index +10.9%): The stock market fell, but eventually recovered. This was due in part to the Fed easing, which kept interest rates low. President Bush won a second term.
- 2008 (S&P 500 Index -37%): With the financial crisis at hand, the Republicans lose to President Obama. His first term was saddled with the global financial meltdown that he inherited. All this while the unemployment rate increased and the economy was stuck in neutral.
- 2012 (S&P 500 Index +16%): The lower interest rates and rising economic conditions helped Obama seal a second term.
- 2016 (S&P 500 Index +11.9%): Donald Trump entered his Presidency in a time of economic growth and seven years into a bull stock market. The market gains and healthy economic conditions led to the lowest unemployment rate in 50 years. The low-interest-rate environment has helped fuel current economic expansion.
Many elections have been influenced by the boom or bust of the economy, along with interest rate changes. While it is hardly fair to blame one president for economic struggles and praise another for its recovery, voters tend to support a change in bad times.
With the long-term average annual return of the S&P 500 index (stock market) around 10% per year, you can see returns have varied from -37% to +23% with no visible pattern.
The impact of the upcoming November election on the stock market is difficult to predict with a high level of confidence. For investors, the best advice is to maintain a diversified investment portfolio that is positioned to meet your current and future personal goals. Over the long-term, including the next several election cycles, there will be more booms and busts. You can best prepare by focusing your portfolio on your objectives and risk tolerance.
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We have helped our clients answer these questions and more. If you want a clear understanding of your financial future, and need help making changes to reach your goals, schedule a consultation and we can get started.
Prior to implementing any investment strategy referenced in this article, either directly or indirectly, please discuss with your investment advisor to determine its applicability. Any corresponding discussion with a Bedel Financial Consulting, Inc. associate pertaining to this article does not serve as personalized investment advice and should not be considered as such.
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