Will the 2020 Election Sink Your Stocks?

It’s common knowledge that it’s best to leave politics out of dinner conversations, especially when sharp knives are involved. You’d also be wise to leave your political biases out of your investment decisions.

Many Republicans believe that the stock market is better off when a Republican is in office. Vice versa, most Democrats will tell you that they feel better about the economy and their investments with a Democrat in charge. Political biases are just one more thing that can cloud your judgment when it comes to investing.

Neither Party Is Better for the Stock Market

Looking at the table below of total returns for the S&P 500 during presidencies since 1929, it’s clear that U.S. stock returns have been much better when a Democrat was the president; however, it would be a mistake to conclude that stock returns were higher because a Democrat held the presidency.1

After you remove outliers such as the Great Depression and the Great Recession, there isn’t great evidence that a president from either party is particularly better for stocks.

Intuitively this makes sense because stock returns are influenced by many factors, such as stock prices, corporate profits, business cycles, monetary policy, consumer confidence, inflation, employment and so on. In addition, the increasingly global economy (the S&P 500 generates more than 50% of revenues outside the U.S.) makes the actions of a single government less important. Lastly, the relationship between cause and effect as it relates to the stock market is often difficult to equate. This is why even the greatest investors of all time say it’s impossible to predict the stock market.

Stay in the Market, Even When Your Party Isn’t in Charge

Since 1896, if you were to invest $10,000 into the S&P 500, you would have now accumulated over $6,000,000. If you were to only invest when your chosen party (whether Democrat or Republican) had the reins, the result would be less than $1,000,000.2 This data reminds us that it’s time in the markets, not market timing, that matters most. Over the years, dividends pour in at about 2% a year. That money is reinvested automatically. Likewise, earnings growth is pretty steady over the long run, about 5%. This translates into steady appreciation across the whole market. Time in the market works because it forces you to ignore your fluctuating emotions.

Our Government Has Been Dysfunctional Before

Actually, our country’s political system has been challenged throughout history. As Winston Churchill once said, “Americans always do the right thing, but only after exhausting all other options.”

Our nation’s history has been littered with political turmoil. On July 11, 1804, a sitting vice president, Aaron Burr, shot and killed a former Secretary of the Treasury, Alexander Hamilton. Today political attack ads get pretty intense, but none end with duels on the White House lawn.

Four years earlier, President John Adams and Vice President Thomas Jefferson—the two highest elected officials in the land and founding fathers of our country—squared off in a race for the White House with posters that included words like: “If you elect Thomas Jefferson, murder, robbery and rape will be practiced throughout the land” and “John Adams is busy importing mistresses from Europe.”

We must also not forget the assassinations of John F. Kennedy and Abraham Lincoln, or the impeachment of Richard Nixon as dramatic tests to our government during calamitous times.

Election Years and Those Following Lead to Primarily Positive Returns

Since 1928, the average stock market return in the year prior to an election has been 9.9%. In fact, out of 23 elections, there were nine negative years during the elections of Ronald Reagan, Jimmy Carter, George W. Bush, Nixon, Barack Obama, Dwight D. Eisenhower, and Franklin D. Roosevelt.3 Despite the uncertainty and concerns about election outcomes, the stock market has proven pretty resilient.

The average return during an election year is 11.3%.2 Only four out of 23 election cycles had the first presidential year of the term run negative. There does seem to be some level of optimism that corresponds with a new president at the helm. Based on the data, when new leaders take over, the rate is 83% positive compared to the typical stock market pattern of 75% positive.

The Stock Market Likes Divided Government

Are the markets happier when the politicians are cooperating and getting more done? Not necessarily. Gridlock seems to be surprisingly good for Wall Street (and the hosts of our favorite news shows). The average Dow Jones return during periods of divided government has been 7%, while returns during a unified government have been closer to 5%. In short, the markets prefer stability with fewer changes in laws and policies; and this sort of stability usually occurs when Congress members and the President are at odds with each other.

No matter your political preference, making investment decisions just because you favor one party or hate another can be destructive to your wealth—especially with no significant data to back it up. As with smart dinner conversation, do yourself a favor and avoid mixing politics with your investing and you will likely see better outcomes over time.

1.       Lazaroff, Peter. (July 26, 2016.) “Democrats Vs. Republicans: Who Is Better For The Stock Market?” Forbes. Retrieved from https://www.forbes.com/sites/peterlazaroff/2016/07/26/democrats-vs-republicans-who-is-better-for-the-stock-market/#1efa6161239d.

2.       Oppenheimer. (November 2018). “Compelling Wealth Management Conversations.” Pages 74 and 75 and Retrieved from https://cdn2.hubspot.net/hubfs/3994374/Oranj_November2018/PDF/Compelling_Wealth_Management_Conversations.pdf

Past performance is no guarantee of future results. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Investing involves risks. 

Wealthrise Financial Planning is an investment advisor registered with FINRA. This material is provided for informational and educational purposes only. It should not be considered investment advice or an offer to buy or sell securities.