Who Are Your Stocks Rooting for in This Year’s Election?

September 18th, 2020 by Tanner Wrisley

Election Day is less than two months away on Tuesday, November 3^rd. For obvious reasons, this year has been unprecedented in many ways. On Wednesday of this week, we hit 30 million reported COVID-19 cases worldwide. No doubt, this election will prove abnormal just like everything else since the pandemic began. But as it approaches, it is worth examining how the stock market typically behaves in relation to election years.

Return following election years

First, let’s look at some historical data on the stock market in relation to election years, regardless of which party is in office:

• The Dow Jones Industrial Average typically returns +2.5% in the year following an election year – this is the lowest average return in the four-year cycle.
• Year two improves to an average of +4.2%, year three is the highest at +10.4% and year four (the election year) averages +6.0%.[1]
• These numbers would have you preparing for a slower growth year in 2021.

What about Republican vs. Democrat?

There are lots of statistics one could look at here, and you would probably be able to find numbers that support your party preference as having the better stock market outlook. But in reality, normal variations in the market tend to dominate annual stock performance. For example, a global pandemic would have adverse effects on your portfolio regardless of who was in office.

There is, however, evidence that shows when a president is re-elected, stock market returns are slightly higher on average[2]. The market doesn’t like uncertainty, so having some semblance of consistency from our political office bodes well for stock prices.

What about congress?

But it is not all about the presidency, far from it. The way congress shakes out is just as, if not more, important than the presidency as far as the market is concerned. Some think a divided government helps keep Washington in check from becoming too radical either way. This may or may not be true, but as far as the stock market is concerned, the data shows that a divided government leads to less returns:

• When the house and senate are divided, the S&P 500 returns about 5.5% on average, but when they are in unison the average return is 15.6%.

[1] How Presidential Elections Affect the Stock Market by Annes Kates Smith 11/9/2016 https://www.kiplinger.com/article/investing/t043-c008-s003-how-presidential-elections-affect-the-stock-market.html

[2] How Presidential Elections Affect the Stock Market US Bank Wealth Management https://www.usbank.com/investing/financial-perspectives/market-news/how-presidential-elections-affect-the-stock-market.html