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Busting Common Election Year Market Myths

Busting Common Election Year Market Myths

May 06, 2024

This is an updated version of an article originally published in September 2020. 

Quick Quiz: Over the past hundred years, only four elected presidents avoided having a full-year market decline (as measured by the S&P 500) occur during their first term of office. Who were they?  (Answer at the end of the article.)

It happens every presidential election year. Various market pundits weigh in on how the stock market will react if either candidate wins. Their prophecies almost never change: If the Democratic candidate wins, their tax-and-spend policies will drive fearful investors from stocks to cash. If a Republican wins, their business-friendly attitude will rally the market to stratospheric levels, building a bubble that's likely to burst. 

What do these outdated, clichéd predictions have in common? They rarely come true. 

Who wins rarely matters over the long-term

While there are sometimes periods of market volatility leading up to a presidential election and shortly afterward, over the long-term the stock market neither consistently reacts negatively to the election of a Democratic president or positively to the election of a Republican—or vice versa.

Not convinced? Here’s some historical context using the S&P 500 as a proxy. From 1925 to 2021, in the first year of the first term of an elected presidential administration:*

  • Democrats: The S&P 500 turned in positive results in the first year after Roosevelt (1933), Truman (1949), Kennedy (1961), Johnson (1965), Clinton (1993), Obama (2009) and Biden (2021) were elected and negative results in the first year of the Carter (1977) administration.
  • Republicans: The S&P 500 turned in positive results in the first year after Calvin Coolidge (1925), George H.W. Bush (1989) and Trump (2017) were elected and negative results in the first year of the Hoover (1929), Eisenhower (1953), Nixon (1969), Reagan (1981) and George W. Bush (2001) administrations.

From 1926 to 2023, the S&P 500 returned, on average, 9.32% per year when a Republican was President, and 14.3% with a Democrat occupying the Oval Office.** 

At first glance it may look like, historically, the market responded more favorably when a Democrat was elected president. But this isn’t a fair conclusion.

Why? Because it ignores the economic realities that existed when some of these presidents began their first term.

For example, when Dwight D. Eisenhower took over the presidency from Harry Truman, the post-Korean War economy was already headed for a recession. When Presidents Nixon, Reagan and George W. Bush began their first terms, they inherited weakening economies from outgoing Democratic presidential administrations that became recessions during their first year in office.  

What does this mean for investors?

Wall Street’s long-term outlook is rarely affected by political rhetoric. It reacts almost exclusively to macroeconomic events, governmental monetary and fiscal policies, and corporate earnings

What investors should learn from the market’s historical refusal to conform to election-year stereotyping is that fleeing to safety based on political or other emotion-driven beliefs almost never pays off over the long run.

Again, history supports this argument. Since 1926, there have only been only 26 years in which the S&P 500 has turned in negative results and only four times when the index posted negative results two or more years in a row (1929-1932, 1939-1941, 1973-1974 and 2000-2002). And over this period, there were only twelve years when the index closed down more than 10% for the year.***

To put this in proper perspective, since 1926, the S&P 500 has posted an average annual return of 12.16%.**

If you’re still worried about a politically-inspired market downturn, it may be advisable to speak with your financial advisor before you make any ill-advised moves.

Quiz answer:  The S&P 500 never posted a full-year decline during the first elected terms of President Coolidge (1925-1928), Truman (1949-1952), Clinton (1993-1996) and Obama (2009-2012). 

 

 

Disclosure: Certain sections of this article contain forward-looking statements based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets. Investments are subject to risk, including the loss of principal. Because investment return and principal value fluctuate, shares may be worth more or less than their original value. Some investments are not suitable for all investors, and there is no guarantee that any investing goal will be met. Talk to your financial advisor before making any investing decisions. The S&P 500 is a market-capitalization-weighted index of the 500 largest U.S. publicly traded companies.

*Calvin Coolidge, Harry Truman and Lyndon Johnson assumed the presidency after their predecessors died in office. All three won their next presidential election and the S&P 500 turned in positive results in the first year of their second term. Gerald Ford is not included here because he was never elected president. 

**Source: https://retirementresearcher.com/are-republicans-or-democrats-better-for-the-stock-market/

***Source: https://www.slickcharts.com/sp500/returns