In a few short weeks, our country will elect a new president. The list of potential market implications of presidential elections seems to be pretty broad including tax policy, trade policies, health care reform, business regulation and foreign policy, just to name a few. This growing list of potential changes is the reason that so much media time and personal conversation has been dedicated to the election recently, so, we decided to see what history can tell us about the impact of elections on the markets. While some will always argue that this time it’s different, this is hardly the first election to feature two opponents with widely differing political views, nor is it the first time that the country seems divided by those ideas and policies. So, with that in mind, let’s take a look at some history.
First, the basics: election years have only a minimal influence on U.S. equity performance and volatility. Over the past 22 election cycles, the average return in an election year has been 7.5% compared to 7.4% for all years. The average volatility in election years has been 12.3% compared to an overall average of 13.9%. In an odd coincidence, on the day I’m writing this, the S&P 500 Index is up 7.62%.
For those of you who want to pick sides, Republican winners are better for election year returns (11.6% vs 4.0%). However, Democrat winners are better for the next three years. Election years without an incumbent have historically been weaker than those with an incumbent running (10.1% vs 3.6%). On that basis, 2016 would seem to be a bit of an outlier so far. Thanks to J.P. Morgan and Bloomberg for the above statistics.
Then we get into the complicated stuff—what about a presidential election paired with the control of Congress? There is a theory (urban legend) that markets prefer divided government. Well, according to an InvesTech search, that seems to be backward. Since 1928, when one party wins the White House and controls both houses of Congress, the average two-year return has been 16.9%; however, when one party wins the White House and the other party controls both houses of Congress, the average return has been 15.6%; and lastly, if both houses of Congress are divided, the return drops to 5.5%.
So what does all of this mean? Nothing. The markets are volatile in the short term based on changes to the environment in which the companies that make up those markets operate. In the long run though, stocks move based on how those companies adapt to those changes in that environment. Election cycles are great for getting us all talking about politics, but investing comes back to the basics: do the companies you invest in have the ability to continue to grow regardless of the political environment around them? Even if a candidate or president seems predisposed to make business more difficult for a certain segment, most of the time good management can find a way to peacefully and profitably co-exist, as the numbers above would seem to indicate.