Every election cycle I get questions about what happens if so-and-so wins. Usually, half the folks out there are worried about the incumbent getting another term, the other half are worried about their candidate losing office and a new candidate being installed. The big area of concern is the presidential election every four years. So, what’s the skinny on how the presidential election affects your finances?
There is an inordinate amount of writing on this topic. If you have the time, I highly encourage you to check out and read the links provided at the bottom of this post by third-party sources. The short, and simplistic answer, is that the election year itself tends to be volatile. With all of the polling and politicking it’s hard for companies to get a handle on the probable winner until close to, or even on, election day. The first year after the election, markets can be sluggish until the winner lays out their plans for managing the nation and gets their team in place.
The bigger question is, what are you measuring against? For example, if you are solely invested in bonds, your experience will be much different than an investor solely invested in stocks. That said, whether Democrat or Republican, markets tend to rise over time, with an average of over 10%* by presidential term (*Per Dimensional Fund Advisors, 10.3%).
Source: Dimensional Fund Advisors
Historically, according to Business Insider, Democrats have been better for the markets overall with fewer down years, and nearly double the returns generated during Republican administrations. Democratic administrations delivered a market return, S&P 500 based, of 10.8% vs. 5.6% for Republican administrations. Excluding the Great Recession of 2008 and the COVID-19 pandemic, Republican administrations do improve, but only to 6.1%.
Democrat or Republican, your approach should be to have a consistent plan, stick to it, and stay invested. That is to say, avoid market timing! Keep in mind that the media uses hair-on-fire headlines to sell their stories. It’s their job. The headline is usually worse than the actual situation. Even with the 2016 election shock, the S&P 500 futures only dropped 5%, but went on to recover. Investors, and the markets in particular, seem to have very short memories.
Consider that the various indices perform differently. Here we have focused on the broader US market, and specifically pegged measurement to the S&P 500. You should consider the returns on all fixed income, foreign developed, and emerging markets just to name a few other classes of interest.
Key points to keep in mind: the stock market is not the economy, don’t try and time the market, have a long-term goal and plan, the stock market is not always aligned with broader economic conditions, and focus on the things you can control (goals, spending, allocation, drawdown plans, etc.). More importantly, whether Democrat or Republican, there tends to be more up years in the market than down years, and over time, markets rise.
If you really want to dig into the data, here is a list of great sites that have crunched the numbers. For disclosure, Engage Advising receives no benefit from these sources and is not responsible for any errors or omissions in the reported data. These are incorporated for your reference only.
Stock Market Performance by President (in Charts) – Darrow Wealth Management
How will the Presidential Election Affect the Stock Market – FA Magazine
Presidents and the Stock Market – Investopedia
Where Trump, Biden Stand on Major Issues – AARP
Democratic Presidents are Better for the Stock Market and Economy than Republicans, One Study Shows – Business Insider
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