Time to read: 8 Minutes
It seems that every four years there is only one thing on everybody’s mind: the presidential election. Americans research each candidate, trying to determine whose views on everything from social issues to foreign policy align most closely with theirs, news outlets dissect each candidate’s background and platform, and everybody tries to guess what will happen come the first Tuesday in November.
For many Americans, it is a time of uncertainty and stress. When you add in deeply opposing views, the impact of the 24-hour news cycle, and a nominee stepping down closer to the election than ever before, it’s understandable that so many feel uneasy.
For many, one of the largest concerns is the impact of the election on the economy. It’s natural for people to wonder how the stock market will change because of the election and worry about how that may affect their personal finances.
We cannot predict what will happen in the months leading up to or immediately following the election. However, we can look at past trends and use them as an indicator of future market conditions. Keep reading to learn more.
Long-Term Impacts
Many assume that the uncertainty, not to mention animosity, many feel during an election year would have a monumental impact on the stock market. Yet, when we look at market performance during election years, it doesn’t appear that there is any significant long-term change.
Those who have studied the trends found that it’s not unusual to see short lived changes in the markets right before an election. Beginning a few months prior to November, the markets tend to temporarily rise. Immediately after the election, it’s common to see an initial dip the markets. In fact, in 60% of the last ten elections, stocks declined as soon as the winner was announced.
This drop very rarely has a long-term affect – within two months of the election, markets are usually back to normal.
When we look even further, the initial drop is even less significant. There has only been one time in the past forty years where the markets had not returned to favorable conditions one year after the election. In this specific instance, the markets were still reeling from the 2000 tech bubble bursting, making it unlikely that the election was to blame.
Positive Performance.
Since the S&P 500 index began there have been 24 presidential elections in the United States. In 20 of the years with presidential elections, the market ended with a positive performance. This means that in 83% of election years, the S&P 500 Index ended the year positively.
The four years with negative performances are even less significant when we consider external factors with clear, direct impacts on the markets. In 2008, we experienced the housing bubble burst, which had a long-lasting negative impact on the S&P 500. Similarly, in 2000 the market was recovering from the burst of dot.com bubble. In the remaining two election years with negative performances, 1940 and 1932, the Great Depression was in full swing.
These trends show that, unless there are extenuating circumstances not caused by the election, presidential election years don’t have any long-term direct impact on the market.
Comparing Economic Growth.
While it’s true that the S&P 500 Index tends to end election years positively, you may be wondering how their annual returns compare to years without a presidential election. Studies show that returns are slightly lower in election years.
The average annual return over the past 96 years is 11.5%, compared to the average annual return during election years, which is 11%. Whether this is the result of the markets returning to their normal rates during the initial decline following the election or a variety of market conditions completely unrelated to the election, we can’t be sure. However, election years do tend to experience lower average annual returns, even if it is nominal.
Also worth noting is that when the newly elected president was a democrat, the average return was 11.24%, comparing to years where the incumbent was a republican, and the average return was 15.3%. Of course, as these numbers are finalized before the candidate takes office, it cannot be attributed to any specific policy change.
Finances are an important part of our daily lives, which makes it easy to worry about anything that may negatively impact our economy. However, as the election draws nearer, feel confident that this election cycle, like each election cycle before it, will likely have no long-term significant impact.
Note: This blog post is for informational purposes only and does not constitute financial advice. Please consult with a qualified financial advisor to discuss your specific situation and develop a personalized financial plan.
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