How Elections Have Affected The Stock Market Historically: Unpacking The Hype

In the months leading up to every election, the airwaves fill with predictions, theories, and enough speculation to fuel Wall Street for decades. Experts and not-so-experts come out of the woodwork to tell us how much the next election will affect the stock market. And if history has taught us anything, it’s that predicting the stock market is almost as tricky as predicting who will win the next reality TV show. But does the outcome of an election actually matter for your portfolio? Or are we just being taken for a ride? Let’s dig into how elections have actually affected the stock market over time.

The Relationship Between Elections and the Stock Market: A Love Story?

First, let’s address the big question: do elections affect the stock market? The answer, like most great love stories (and finance articles), is complicated. Every four years, people brace for impact, expecting that a win for the “right” party will send their stocks soaring while a win for the “wrong” party will tank their 401(k). But historically, the stock market doesn’t seem to get the memo. In fact, data suggests that elections haven’t had the seismic effects people think they have on the stock market. Sure, there are fluctuations and volatility around Election Day, but most of these changes are temporary, and, in the long run, markets tend to follow their own trajectory.

Democratic vs. Republican Wins: What Really Happens?

Ah, the age-old question: is the stock market happier under a Republican president or a Democratic one? Opinions abound, and many have argued that Republicans, with their traditionally pro-business policies, should logically benefit the stock market. Especially a businessman such as Donald Trump. On the other hand, Democrats often focus on regulation and fiscal spending, which could theoretically hold the market back. But if logic played much of a role in the stock market, none of us would need this article, right? I wouldn’t have done all this research. But I did. Because the answer is complicated.

Historically, the data is surprisingly even-handed. Studies by major financial institutions, like Fidelity and Vanguard, show that the stock market has generally risen under both Democratic and Republican presidencies, albeit with some interesting differences.

Democratic Wins vs. Republican Wins

• Democratic Wins: Historically, the stock market has seen relatively strong performance under Democratic presidents. Since the early 1900s, Democratic presidencies have averaged slightly higher annual returns in the S&P 500 than Republican ones. But before you get too excited or disappointed, remember these averages smooth out a lot of volatility. It’s also crucial to note that correlation doesn’t equal causation, and many external factors (like wars, tech booms, and recessions) tend to play a more significant role in stock market movements than who’s sitting in the Oval Office.
• Republican Wins: Under Republican administrations, the stock market has seen steady, if not sometimes slower, growth on average. However, Republicans have also presided over some of the biggest bull markets in history, including the roaring market of the 1980s under Reagan. Republicans tend to champion policies like tax cuts and deregulation, which investors often view as market-friendly. But these policies don’t always translate into short-term gains, and the market has occasionally stumbled under GOP administrations as well.

So, can we conclusively say that one party makes the market go up more than the other? Not really. The stock market is a complex beast with thousands of factors influencing its performance, and the political party in power is just one piece of a much larger puzzle. It just happens to be the one piece that’s relevant right now.

The Election Cycle and Stock Market Behavior

The election cycle itself is often said to have an impact on the stock market. Some analysts believe that markets tend to follow a “four-year pattern” aligned with the election cycle, with each year bringing its own flavor of market performance:

1. Election Year (Year 4): This is where things get interesting—and typically volatile. Investors speculate like it’s going out of style, and rumors about policy changes are everywhere. While the market may experience short-term dips due to uncertainty, it generally recovers quickly post-election.
2. Post-Election Year (Year 1): Investors take a collective deep breath as the new president gets to work. If a new party has taken power, some market jitters might occur as investors assess policy shifts. Historically, though, markets stabilize, and growth continues as usual.
3. Midterm Election Year (Year 2): Often seen as a slower growth period for the market. Midterm elections can lead to shifts in Congress, which may introduce some uncertainty, but it’s usually not enough to cause dramatic market swings.
4. Pre-Election Year (Year 3): Here’s the fun part. The year before a presidential election has historically been one of the strongest for stock market returns, regardless of which party is in power. It’s like the market is gearing up for the big day and pulling out all the stops. Some call this the “pre-election bump,” which could be linked to incumbent presidents trying to boost the economy in anticipation of the coming election.

So, while the election cycle seems to correlate with certain stock market patterns, it’s more of a temporary ripple than a long-term tidal wave.

But What About Market Volatility Around Elections?

Volatility, the stock market’s version of mood swings, often picks up around election time. And understandably so! Investors are naturally jittery about the potential for big policy changes. However, while volatility can increase in the weeks before an election, it generally fades quickly once the results are in. This is because the stock market hates uncertainty more than it hates unfavorable policies.

In the lead-up to an election, investors start buying and selling based on how they think the market will react to a potential Democratic or Republican win. But once the ballots are counted and the result is in, this uncertainty disappears, and the market often settles down. So, while elections do indeed affect the stock market in the short term, these fluctuations are typically just noise. By the time the new administration is a few months in, the stock market has usually found its groove again.

Key Historical Examples of Election Impact (Or Lack Thereof)

If you’re looking for historical examples to show just how little elections actually impact the stock market long-term, let’s take a trip down memory lane:

• The Great Depression (1932 Election): When Franklin D. Roosevelt took over from Herbert Hoover, the country was in the depths of the Great Depression. The market rallied after his election and continued upward during his presidency, largely due to his New Deal policies. But again, the market’s recovery had less to do with FDR himself and more to do with the overall economic response to the crisis.
• The Reagan Bull Market (1980 Election): Ronald Reagan’s election is often cited as a turning point for the stock market, which experienced substantial growth during his time in office. However, while Reagan’s pro-business policies contributed to the market boom, it was also driven by a combination of factors, including high interest rates and advancements in technology.
• The Obama and Trump Years (2008 & 2016 Elections): After the 2008 financial crisis, Barack Obama’s election brought an era of recovery for the stock market, which grew steadily throughout his two terms. Similarly, when Donald Trump was elected in 2016, the market continued to climb. However, in both cases, the performance was influenced by broader economic factors, like the Federal Reserve’s policies, rather than any single president’s decisions.

Why Long-Term Investors Shouldn’t Worry About Elections

If there’s one takeaway here, it’s this: while elections can and do create short-term fluctuations, the stock market is generally resilient. That is especially true if you stay in it for the long haul, as you should any time you’re in the market. If you’re a long-term investor, it’s best to sit tight and ignore the noise. Over the decades, the stock market has shown an impressive ability to adapt to changing administrations and policies. Yes, elections can affect the stock market temporarily, but it bounces back like a rubber ball, regardless of which party holds power.

In fact, trying to time the market based on election outcomes is a risky game. Studies have shown that missing just a handful of the market’s best days can have a massive impact on your returns. And since many of those “best days” can occur during periods of volatility, stepping out of the market during election years could actually hurt your long-term gains.

Final Thoughts: Elections, the Stock Market, and You

At the end of the day, elections are important, but not in the way that many people think when it comes to investing. Yes, elections affect the stock market—sometimes—but not nearly as much or as permanently as we’re led to believe. The market has a way of cutting through the noise and returning to a steady upward climb. So, whether it’s a blue wave, a red wave, or even a purple one, the best move for investors is often to stay calm, carry on, and remember that markets move on their own terms.

TL;DR: Don’t let the election hype dictate your financial future. Play the long game, and your portfolio will thank you.

This post originally appeared at MoneyMiniBlog.

Category: Stocks