This article, which explores the patterns of market performance during a number of presidential terms, seeks to calculate what investors might be in for, depending on the outcome of the November 5 US election.

In the lead up to the elections, many investors often find themselves questioning whether to make an investment decision based on how the result may unfold. With the US election now only one month away, US asset manager Dimensional Fund Advisors (interviewed by this news service about its methodology, and here about its work in Singapore) has analysed the response of the S&P 500 to elections over the past 100 years to answer three common questions investors ask about elections.

This news service is pleased to share these insights; the usual editorial disclaimers and health warnings apply to views of guest contributors. And, as ever, we invite people who want to jump into the conversation to do so. Email tom.burroughes@wealthbriefing.com

While investors may be worried about returns during an election month – when uncertainty may be peaking – data shows that returns in election months have not tended to be that different from returns in any other month. When looking at a broad-market US index going back to 1926, the results don’t reflect any consistent pattern.

This chart (exhibit 1) shows monthly stock-market returns in 1 per cent increments: each dash represents a month. On the left side are the months with market declines. Months with market gains are shown on the right side. The blue and red dashes represent months during which a presidential election was held. Blue indicates that a Democrat won the election and red represents a Republican winning the White House.

Most election months haven’t produced extreme returns in one direction or the other. The winning party hasn’t been a reliable driver for the direction or magnitude of market movements in election months, either.

Exhibit 1 – monthly returns for the S&P 500, 1926 to 2023

Past performance is not a guarantee of future results. Disclosure: In USD. Dashes representing returns for a given month are stacked in ascending order of return within each column, with the highest return within that range on top. S&P data © 2024 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio.

How have presidential elections historically affected markets?
During a presidential election year, it’s natural for investors to seek a connection between who wins the White House and which way stocks will go. Some may even wonder whether they should get out of the stock market altogether before the ballots are counted. But a look at history may offer some reassurance. Remember, shareholders are investing in companies, not politicians, and stocks haven’t shown much of a party preference.

When looking at the growth of $1 invested in the S&P 500, 1926 to 2023 (nearly 100 years of US presidential terms) stocks have consistently marched upward regardless of whether the administration is Democratic or whether Republicans are controlling the White House (exhibit 2). US presidents may have an impact on market returns, but so do many other factors. These include the actions of foreign leaders, interest rates, changing oil prices, and technological advances, just to name a few.

Exhibit 2 – Growth of $1 Invested in the S&P 500, 1926 to 2023

Past performance is not a guarantee of future results. In USD, Growth of wealth shows the growth of a hypothetical investment of $1 in the securities in the S&P 500 index. S&P data © 2024 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. Data presented in the growth of wealth chart is hypothetical and assumes reinvestment of income and no transaction costs or taxes. The chart is for illustrative purposes only and is not indicative of any investment. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio.

How has the party in control of Congress historically affected the market?
Control of Congress hasn’t been a reliable market gauge either. Nearly a century of US stock market data suggests that making investment decisions based on which party controls the House or the Senate is unlikely to lead to better outcomes. From 1926 to 2023, stocks trended higher regardless of whether Democrats were in charge of Congress or Republicans controlled the House and the Senate (exhibit 3). Markets also generally rose when control of Congress was mixed.

Exhibit 3 – Growth of $1 Invested in the S&P 500, 1926 to 2023 coloured with who was in charge of Congress

Past performance is not a guarantee of future results. In USD, growth of wealth shows the growth of a hypothetical investment of $1 in the securities in the S&P 500 index. S&P data © 2024 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. Data presented in the growth of wealth chart is hypothetical and assumes reinvestment of income and no transaction costs or taxes. The chart is for illustrative purposes only and is not indicative of any investment. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio.

Advice for investors in the lead up to November’s US election
While it may be natural to wonder whether you should make an investment decision based on how you think elections might unfold, data suggests that such moves are unlikely to result in better returns. On the contrary, these moves may lead to costly mistakes, for instance getting out of stocks based on a hunch and missing rewarding returns. There is a stronger case for investors to look at past elections and maintain a steady approach to markets – in other words, make a long-term plan and stick to it. After all, the market isn't a reflection of who gets elected president but of the efforts of companies to solve problems and provide goods and services. In the long run, innovation succeeds, no matter what politicians do.

Footnotes

1, Sources: International Institute for Democracy and Electoral Assistance, World Bank. Population figures for 2024 are based on most recently reported World Bank figures, as of January 2024.