Presidential Elections Don’t Matter (For Markets)
Published On: October 5, 2020
Written by: Ben Atwater and Matt Malick
As the stock market fell in September, we have heard more and more questions about the impact of the coming presidential election on the market.
Although it seems commonsense to believe elections would influence market performance, there is no historical evidence to suggest any meaningful cause and effect around elections. If anything, the evidence is highly counterintuitive.
One of the clearest studies comes from The Vanguard Group. Looking at 160 years of data, Vanguard calculated the returns of a 60% stock and 40% bond portfolio during 40 election years and 120 nonelection years. During presidential election years, the balanced portfolio returned 8.9%, while during non-election years the balanced portfolio returned 8.1%.
Although statistically insignificant, election years have outperformed nonelection years. This is a counterintuitive result as most would think the market would underperform in the “uncertainty” of an election year. Bear in mind, this data starts in 1860 when Abraham Lincoln won the presidency right through to the election of Donald Trump.
Vanguard not only looked at returns, but they also examined volatility. Given the modern verbal bloodbath presidential elections have become, one would assume a noticeable rise in volatility in the months closest to an election. But the counterintuitive strikes again.
From January 1, 1964, to December 31, 2019, the Standard & Poor’s 500 Index’s annualized volatility was 13.8% in the 100 days both before and after a presidential election, which was amazingly lower than the 15.7% annualized volatility for the full 56-year period.
Presidential election years seem to bring out the worst in our nature with a viciousness and absolutism that only seems to intensify with each election cycle. One would certainly assume, then, that stocks as an asset class underperform in presidential election years. Not so. According to BlackRock, from 1926 through 2019 (what most call “the modern stock market”), presidential election years returned an average of 11.3%, while all years averaged 10.1%. Mid-term election years had the lowest return at 8.6%, while non-election years (odd years, no midterm or presidential election) returned 14.3%.
We often hear elections will influence tax rates, which is obviously true, but do taxes really effect the economy and stock prices as much as we think? According to a recent study by Fidelity, in the 13 previous instances of tax increases (any or all of personal, corporate or capital gains rates) since 1950, the Standard and Poor’s 500 stock index had higher average returns and higher odds of an advance than average. Yes, a third counterintuitive data point.
It is a common mistake for investors to attempt to handicap events and invest based on their predictions or forecasts. But in many of these instances people don’t even know what they are handicapping. Predictions are difficult enough, but making predictions using assumptions that are incorrect only compounds the problem.