The stock market is often viewed as the pulse of a nation’s economic health, with millions of investors, analysts, and policymakers closely monitoring its fluctuations. Among the many factors that influence market behaviour, the role of the U.S. President stands out as particularly significant.
As the leader of the world’s largest economy, the President’s policies, statements, and actions can have far-reaching effects on market confidence and investor sentiment. But to what extent does the occupant of the Oval Office truly impact the stock market? Is it the President’s policies that drive market movements, or are other factors at play?
Proponents argue that presidents, through legislation, executive orders, public remarks, and just their leadership style, can have a tangible impact on business confidence, consumer spending, trade relations, and the overall economic outlook. This uncertainty and change in expectations could potentially drive market or sustained trends. Critics contend that presidential impact is often overstated, as markets are fundamentally driven by cyclical economic forces that no individual leader can dramatically alter over a four or eight-year term.
In this article, we will delve into the historical data to unpack the complex relationship between the U.S. presidency and stock market performance. By examining past administrations and key market events, we aim to shed light on whether the influence of the President is as significant as many believe or if broader economic forces beyond the control of any single individual drive the stock market.
Historical trends
When examining the historical trends of the stock market in U.S. presidential elections, a nuanced picture emerges. Since 1927, the S&P 500 has averaged an 11% return during presidential election years, which is slightly below its overall annual average.
Despite this underperformance, election years have generally been favourable for investors, with the S&P 500 delivering gains more frequently than non-election years. Specifically, since 1926, U.S. stocks have ended an election year in the red only four times, constituting just 17% of election years. These downturns were primarily driven by major geopolitical or financial market events rather than the election itself. In contrast, non-election years have seen the S&P 500 experience annual losses nearly twice as often, occurring in 30% of those years.
Period leading up to the election
In the months leading up to a U.S. presidential election, the stock market often experiences a notable increase in volatility. This elevated market fluctuation is mainly attributable to the uncertainty that elections introduce. This period of heightened volatility is not merely coincidental but has shown a remarkable ability to predict election outcomes, reflecting the market’s sensitivity to political dynamics.
Since 1928, the performance of the S&P 500 in the three months before an election has accurately forecasted the result in 87% of cases. This predictive power has been even more striking since 1984, with the market correctly anticipating the winner in every election during this period.
Specifically, when the S&P 500 posts positive returns in the three months leading up to the election, the incumbent party tends to win. Conversely, if the index suffers losses, the incumbent party is more likely to lose. This trend likely reflects investor sentiment and confidence in the current administration’s economic policies. A declining market in this crucial three-month window often signals investor apprehension and a lack of confidence in the status quo, thereby hinting at a desire for change.
The month immediately preceding the election is particularly volatile as investors react to the latest polls, debates, and campaign developments. This final stretch before votes are cast often sees the highest levels of market fluctuation, underscoring the significant interplay between political events and market behaviour. The anticipation of potential policy changes and their impact on various sectors of the economy creates a charged atmosphere where every new piece of information can lead to significant market movements.
Stock market performance post-election
In the six months following a U.S. presidential election, stock market volatility tends to stabilise, reflecting a return to normalcy as political uncertainty dissipates. Historical trends indicate that irrespective of the party in power, the U.S. economy has exhibited robust growth over the past century.
Data shows that the S&P 500 generally maintains positive returns regardless of the electoral cycle, suggesting that broader economic and inflation trends exert a more significant influence on market performance than the outcome of presidential elections. This consistent performance underscores the resilience of the U.S. economy and the stock market’s ability to adapt and thrive amidst political changes.
Over the long term, the influence of presidential elections on the stock market seems to be minimal compared to more fundamental economic indicators. Factors such as growth rates, interest rates, inflation, and corporate earnings play a more pivotal role in shaping market trends. While election periods may introduce short-term volatility and uncertainty, these effects are typically short-lived.
In essence, while the stock market may react to the immediate uncertainties surrounding a presidential election, its long-term performance is more closely tied to enduring economic trends. Political passions and party affiliations, though significant in the short term, are ultimately outweighed by the broader forces that drive economic growth and corporate profitability.
The fifth perspective
While U.S. presidential elections do have a noticeable impact on the stock market, particularly in the short term with increased volatility and fluctuations, it’s important not to overstate their long-term influence. Historical data shows that despite the political party in power, the U.S. economy has grown steadily over the decades, and the stock market has generally trended upwards.
Stressing over market performance due to electoral outcomes can be counterproductive. Instead, investors should focus on what they can control: making sound investment decisions based on fundamental analysis and maintaining a well-diversified portfolio. In essence, while elections are significant events, their impact on the stock market is just one of many factors to consider in a comprehensive investment strategy.
As Warren Buffett says, “Don’t bet against America”. Staying invested in companies with good long-term fundamentals, and adding to those investments when the market is low, consistently delivers inflation beating returns. That last chart really says it all. Even our local index beats inflation if you dollar cost-average and re-invest your dividends.
The 20th century was American, could we see another American century?