How Will the Presidential Election Impact the Stock Market:  Mundane or Mayhem?

As we look toward our next presidential election on Tuesday, November 5, many Americans are concerned about what impact the election will have on the value of their investments.  Will stock market performance vary drastically depending on who wins?  How will the market react if the election results are contested? 

Seasoned investors are undoubtedly familiar with the phrase, “past performance is not a guarantee of future returns.”  However, since our PFS crystal ball is currently broken, historical precedent is the best indicator of what we can expect in the coming month.  Precedent tells us that a contested election does not necessarily induce negative stock market performance and that market performance in months or years that include a presidential election have a similar range of outcomes to non-election months and years.  Fortunately for investors, this means that most months and years including presidential elections have positive stock market returns. 

Election Months.  Earlier this year, Dimensional Fund Advisors published an article evaluating monthly stock market returns (as represented by the S&P 500) since the mid-1920s, highlighting the months in which a presidential election took place.  The returns for election months varied from -10% to +13%, but the majority of election months produced returns in the range of -2% to +6%, which is comparable to the trend for non-election months as well.  There was also no discernible pattern among monthly returns based on which party won the presidential election.  Election month returns fell in a similar range of outcomes whether a Republican or Democratic took over the White House.

Election Years.  Dimensional Fund Advisors also evaluated annual stock market returns in the year of a presidential election and in the following year, using S&P 500 data since the 1920s.  The average stock market return during an election year is 11.57%, and in the year following the election, the average return is 10.67%, which is very similar to the overall average return of the S&P 500 during that timeframe (approximately 10%).  The record in terms of market performance amid contested elections is mixed.  While the stock market dropped by around 10% in the year during and the year after the election of George W. Bush over Al Gore (remember the hanging chads?!), the market soared in the years during and year after the election of Joe Biden over Donald Trump.  In fact, for the past four presidential elections, the stock market returns in the following year have exceeded 20%.

In practice, historical data suggests that investors should stay the course during election season.  Stick to the long-term plan for your portfolios and avoid the temptation to try to outguess the expectations for future growth that are already reflected in stock prices through the trades of millions of investors around the world every day.