Exploring Presidential Election Year Stock Market Impacts

By Francis L. Ostrom, III, CFP®, CBEC®, Director of Financial Services

In the onslaught of presidential race commercials, politically-charged debates, and constant media coverage, it’s natural to wonder about the influence of a presidential election year on the financial markets. Some investors may even be tempted to make portfolio changes in the face of uncertainty. However, just like in major ups and downs of the market, it’s wise to take a long-term view of your goals and remain disciplined in your financial plan.

Surprisingly to many, analysis shows the election has a negligible effect on financial market performance over the medium to long term, irrespective of potential election outcomes.¹ Instead, many suggest the market is primarily influenced by broader economic trends rather than election results.

If anything, the widely discussed “Election Year Effect” or “Presidential Election Cycle Theory” proposes that stock market returns tend to be positive during these years.  To learn more, let’s dive into the historical performance of the S&P (Standard & Poor) 500 Index.²

Since the start of the S&P 500 Index, there have been 23 presidential elections. On average, the return was 15.3% when a Republican candidate was elected, compared to 7.6% for a Democrat. Throughout all presidential election years, the average return stood at 11.28%.

In these election years, positive performance was seen in 19 out of 23 instances, accounting for 83%. The most significant gain, 43.6%, occurred in 1928 when President Hoover was elected, followed by 33.9% in 1936 when President Roosevelt took office, and 32.4% in 1980 when President Reagan assumed office.

Conversely, the most substantial loss, -37.0%, happened in 2008 upon President Obama’s election, trailed by -9.8% in 1940 when President Roosevelt was reelected and -9.1% in 2000 when President Bush began his term. It should be noted that recessions are unpredictable and cannot be directly correlated to a presidential election.

Many factors affect stock market returns, and historical patterns may offer some insights, but it’s important to note that past performance is not indicative of future results.

To that end, the data does suggest that inflation and global economic trends tend to have a greater correlation with the market than the election results. ¹ So, while the elections take up much of our collective consciousness, it’s important not to get distracted by short-term events.

Investors should assess their financial goals, risk tolerance, and investment timeline rather than solely relying on election year trends or being overly concerned.

That said, the “Election Year Effect” or “Presidential Election Cycle Theory” is a broad generalization and may not align with market outcomes in every election cycle. So, we will see what happens in 2024.

Contact us to learn about how Davie Kaplan’s approach can help you with investment strategies for years to come.

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1. USBank.com, 2024
   
2. TheBalance.com, March 13, 2022. The S&P 500 Composite Index is an unmanaged index that is considered representative of the overall U.S. stock market. Index performance is not indicative of the past performance of a particular investment. Individuals cannot invest directly in an index. The return and principal value of stock prices will fluctuate as market conditions change. And shares, when sold, may be worth more or less than their original cost.

*Standard & Poor’s is a corporation that rates stocks and corporate and municipal bonds according to risk profiles. The S&P 500 is an index of 500 major, large-cap U.S. corporations. You cannot invest directly in an index.

*Investments are subject to market risks including the potential loss of principal invested.