Presidential Elections and the Stock Market

Beth Misak |

By Paul Hynes, CFP®
September 2020

Lately I’m being asked more and more, “What do you think will happen to the stock market if [enter presidential candidate name] wins in November?” My answer often comes in the form of a question: “What do you think will happen?”

Most respondents predict that the market will either go way up or way down, depending on the person’s perspectives and preferences. Rarely does anyone respond that the outcome of the presidential election will be inconsequential to the stock market.

History, however, tells us that the last scenario is much more likely to be the case. Here’s why.

Markets tend to focus on the potential future outlook for the economy and the resulting effects on the profitability of businesses. Less of the attention seems to focus on which party or candidate wins the White House. Plus, the stock market has generally trended higher, regardless of the political party of the resident at the White House.

*S&P 500 Index Total Returns During Presidential Election Years (1928-2016)
U.S. Presidential Election Results Average return
A Republican was elected 15.3%
A Democrat was elected 7.6%
All election years 11.25%

Source: Y-Charts, Morningstar


Further, high school civics teaches us about the division of power. The United States has three branches of government: Executive, Legislative, and Judicial. The Legislative Branch is divided into two bodies: Senate and House of Representatives. The Senate and House put forth and enact legislation that becomes the law of the land. The President doesn’t make law, although he or she does have veto power. Civics refresher is now over.

The President is but one of the three “bodies” that hold power. As of today, the White House and Senate are controlled by Republicans, while the House is controlled by Democrats. Obviously, that can change. So, let’s start by comparing the four possible outcomes of the upcoming election, in no particular order.

  WHITE HOUSE SENATE HOUSE OF REPRESENTATIVES
A Stays in Republican control Stays in Republican control Stays in Democrat control
B Flips to Democrat control Stays in Republican control Stays in Democrat control
C Stays in Republican control Stays in Republican control Flips to Republican control
D Flips to Democrat control Flips to Democrat control Stays in Democrat control

 

In cases A and B, no single party controls all three bodies of power. In this case, the typical result is a stalemate, and not much changes.

In cases C and D, one party controls all three bodies of power. In this case, one party may try to advance their own agenda, at least until the next election in two years hence.

I’ll leave the handicapping of the possible outcomes to others. Yet, simple math tells us that in half of the possible outcomes, power stays divided. In that case, likely little will change. In one of the four possible outcomes, the Democrats can try to advance their agenda. In the other, the Republicans can try to advance theirs.

In order for things to change much, Democrats need to flip both the White House and the Senate to their control. Or, Republicans need to flip the House of Representatives to their control. Even then, the focus for the next year or so is likely to remain on the potential recovery for the economy and jobs.

All of the possible situations outlined have been in place at one time or another throughout our history.

This short video,1 by Mark Gochnour and Jake DeKinder of Dimensional Fund Advisors, further corroborates historical data showing that the stock market has generally trended higher after a presidential election, regardless of the political party of the resident at the White House.

No one can predict the future. However, we do try to prepare for all kinds of potential market conditions. Talk with us if you want to discuss your own situation. We’re here to help.


Sources:

1Dimensional Fund Advisors, video “Highlights: What History Tells Us About Elections and the Market.” Sept. 23, 2020.

The data was compiled for illustrative purposes only from a history of index returns commonly known as the S&P 500 Index and its predecessors. The S&P 500 is an unmanaged index of 500 stocks used to measure large-cap U.S. stock market performance. Investors cannot invest directly in an index. Index returns do not reflect any fees, expenses or sales charges. Past performance and history is no guarantee of future results or events.