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How Presidential Election Years Affect the Stock Market | WT Wealth Management White Paper

With the Iowa Caucus and New Hampshire Primary completed, the Presidential Election again takes center stage as hotly debated issues such as domestic policies, new laws and foreign relations come front and center. The question on every investor's mind is how does the balance of power in Washington DC affect the market?

In short, elections tend to have minimal impact on financial market performance in the medium to long-term.

In the short-term, however, there are a few scenarios that are worth further investigation. US Bank Asset Management(1) conducted an analysis using election outcomes and market performance going back to 1948. The analysis compared the average 3-month returns following each election to the average 3-month return during the full period and yielded some interesting results.

Historical election outcome scenarios and market performance

Historical election outcome scenarios and market performance
Source: U.S. Bank Asset Management Group

Counter to the popular belief that a Republican or Democratic "sweep"(2) has the highest likelihood of causing market disruption, historically there is no statistically significant relationship between sweep outcomes and market performance. However, the data uncovered three divided-government outcomes with statistical significance (Democratic President and Republican Congress, Democratic President and split Congress, and Republican President and Democratic Congress).

Depending on the hot-button issues of the particular election, individual sectors and industries may be more affected than others. Below are a few issues to pay close attention to:

While it is important to understand how election results may affect the stock market, investors are wise to consider other factors that might have a more direct impact on their portfolios. The Investment Committee at WT Wealth Management closely monitors employment, economic growth (GDP), inflation trends and monetary policy (Fed actions) which tend to have a stronger, more consistent relationship with market returns than election outcomes.

Pandemics aside, over the last few years we have witnessed that rising growth and falling inflation have been associated with returns above long-term averages, while falling growth and rising inflation have corresponded to below average market returns. Staying focused on these patterns is undoubtedly more insightful than potential election outcomes when it comes to predicting market performance.

Uncertain election outcomes or delays in the announcement of election results, such as glitches in voting machines or problems with ballot boxes, can cause market uncertainty, in which case riskier asset classes might experience heightened volatility until clarity emerges. I clearly remember the market gyrations around the hanging "chads" controversy of 2000 with the Supreme Court ultimately weighing in on Bush vs. Gore results.

Over the coming months, potential presidential and congressional election scenarios will evolve and come into focus. However, with the 2024 U.S. elections still months away, it is important to remember that employment, economic growth, interest rates and inflation remain more critical factors than election results and, so far, those seem to be falling in favor of investors.

Sources

  1. How presidential elections affect the stock market
    usbank.com
  2. A sweep is defined as an election cycle where a single party controls both the White House and Congress.




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