One question that has been on investors’ minds lately: “How will the upcoming election impact the stock market?”
It is very difficult to predict the direction of the stock market over the next 12 months based on any set of factors, let alone the results of an election. In general, it is best to avoid predicting markets at all.
Instead of trying to forecast an election outcome and then trying to forecast the stock market based on that outcome, one can look at how the stock market has behaved historically around presidential election cycles.
Market years can be sorted into four categories: presidential election years (“election year”), the year after a presidential election (“year after”), midterm election years (“midterm”), and the year before a presidential election (“year prior”).
Comprehensive S&P 500 Index performance numbers go back to 1928, covering 96 years and 24 presidential election cycles. Using these data, my company and I calculated the number of up years and down years for each category over those 24 cycles. We then examined average returns for the market during election years and the years after an election. Here are the findings:
The market performs well in election years: The market had 20 up years and only four down years during election years. Put another way, the market has been up during an election year 83% of the time, whereas the market had an up year 73% of the time in the past 96 years. Average election-year returns for the market are 10.2% per year, a return slightly better than the 10% per year average for all market years from 1928 to 2023.
The year after an election has been weaker over the past 24 cycles: The year after an election (as well as the midterm year) has been a down year 10 out of 24 cycles. These two years (year after election and midterm) have seen up years just 58% of the time versus the 73% average overall. The average return for the year after an election was 8.5% from 1928 to 2023, 1.5 percentage points below the average for all years.
“Year after” returns surged in the past five election cycles: Before 2005, the year after the presidential election was unquestionably the weakest for the overall market. The market had more up years than down years dating back to 1928, and the average return for those “year after” periods was just 5.1%. However, each of the past five “year after” years have shown strong returns, with an average return over those five years of 22.5%.
Based on these statistics, the presidential election has a somewhat limited impact on the returns of the stock market.
Election years have frequently been positive for the stock market. Years after the election had historically weaker market years through 2001, but the past five cycles have called that pattern into question.
In recent years, the identity of the winning party has had little to do with market performance.
In 2016, former President Donald Trump won in an upset victory, and the stock market surged both the next day and over the following 12 months.
In 2020, when President Joe Biden was confirmed the winner, the stock market also surged both the next day and over the following 12 months.
The presidential election has a far lower impact on the stock market than the long-run performance of American business, which will likely remain strong regardless of who wins the White House in November.
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