Ballots + Bull Markets: The Effects of Elections

Every four years, campaigns for the Oval Office stir up strong sentiments, not only about politics but also about the investment markets.

During the last election cycle, one of our clients found himself grappling with his options at the polls as well as with the market’s increased volatility. Concerned about the potential impact on his investments, he contemplated selling his assets to prevent significant losses. By talking through what to expect both in the lead-up to, and following the election, we reassured him about the normalcy of market fluctuations during election periods, enabling him to stay invested and benefit from the post-election market recovery.

With the 2024 election approaching, we decided to address election-year expectations so that you can be confident in staying the course.

Normal Equity Returns

When comparing annual S&P 500 returns from 1927 through 2019, there is only a modest decrease during presidential election years compared to the long-term average. Even during election years, the index still tended to post double-digit gains.

• The S&P 500 Index averaged an annual gain of 11.4% during the 92-year span of January 1^st, 1927 to December 31^st, 2019.
• During presidential election years, the average S&P return was 10.7%.

Heightened Volatility

Although the market can be expected to rise on the year, that’s not to say the ride will be smooth. Returns during primary season, or the first 5 months of election years, have historically been characterized by higher volatility and lower returns, largely due to uncertainty.

• During primary season, the S&P 500 generally posts lower returns and experiences higher volatility than during the same period of non-election years.
• Markets historically bounce back after primaries, rallying throughout the rest of the year once investors get clarity about nominees moving into the general election, regardless of who is selected.

The Market Trends Higher Regardless of Washington’s Makeup

History has shown that which party has control of the White House and Congress has limited impact on financial markets.

• When one party controls the White House and Congress – stocks average 10.0%.
• When Congress is split – stocks average 10.4%.
• When Congress is controlled by the opposite party of the president – stocks average 7.4%.

Staying the Course Yields the Best Returns

Uncertainty or fears can cause investors to become defensive and increase cash holdings and reduce equity ahead of elections. In fact, net asset flows into money market funds have been more than twice as high in election years compared to years after an election¹. However, this has typically proven to hurt investors in the long run. While past results are not predictive of future returns, the S&P 500 has only posted an annual loss in two of the last twenty election years (and both downturns were attributed to price bubbles rather than politics). Investors who parked their money in cash during election years only outperformed investors who stayed fully invested or contributed consistently to their portfolio in three of twenty-three periods.

Investors may believe they know the best times to buy and sell their securities. However, effective market timing requires getting three things right: correctly timing the sell, doing it in a large enough size that it has a material impact, and correctly timing the buy on the way back in. Moreover, the cost of market timing can be high when you get it wrong. As shown in the chart below, missing just a few of the best trading days can have a material impact on the overall return of your portfolio. Additionally, most of the best days in the market happen during market pullbacks. At the times it is most tempting to make a move, it may also be the most dangerous time to do it. The best way to make sure you don’t miss out on the best days is to stay the course.