Every four years, the U.S. presidential election can have a major impact on policy, laws and foreign relations. But how do presidential elections affect the market? And how does that affect you?
To better understand, U.S. Bank analysts studied market data from the past 90 years and identified patterns that repeated themselves during election cycles. While these are predictions only based on historical data, this look shows how these patterns might affect your portfolio, what you should know for the 2020 election, and how to weather election cycles as an investor.
The stock market and elections
A review of market data for the S&P 500* going back to the 1930s revealed certain patterns emerging over those 90 years. The analysts saw that, on average, both stock (equity) and bond markets showed more muted performance in the year leading up to a presidential election than they did at other times.
“When it’s a general election, the equity market underperforms slightly,” explains Tom Hainlin, national investment strategist at U.S. Bank. “Not to the point where we have concern for client portfolios, but that’s what we’ve seen from historical evidence.”
In any given 12-month period, the analysts saw equities generally providing gains of about 8.5 percent – but in the year leading up to a presidential election, gains totaled less than 6 percent. Bond markets provided similar results, with returns of around 6.5 percent in the year leading up to a presidential election, compared with their more typical 7.5 percent in any given 12-month period.
“With presidential elections, you need to make sure to have all the components of a diversified portfolio in place, and then stick to a longer-term strategy that’s designed for more than one election cycle.”
Stock market performance after elections
There are a few different variables that can affect the stock market performance:
- After an election, stock market returns tend to be slightly lower for the following year, while bonds tend to outperform slightly after the election. It doesn’t seem to make much difference which party takes office, but it does matter whether control of the White House changes hands.
- When a new party comes into power, the analysts found that stock market gains averaged 5 percent.
- When the same president is re-elected or if one party retains control of the White House, returns were slightly higher, at 6.5 percent.
Stock market performance in midterm election years
When the analysts looked at data around midterm elections, they found that the S&P 500 consistently outperformed in the year after midterms compared with non-midterm years. Just like presidential elections, which party controls Congress generally was not a factor to overall equity performance.
These equity and bond market trends were consistent over time unless there was a dramatic disruption. Rob Haworth, senior investment strategy director at U.S. Bank, believes the reason for this consistency is fairly straightforward: Markets do not like uncertainty. “Every four years in the U.S., we have more uncertainty,” he says, “and so the data is very explainable.”
Specific stock market sectors to watch in 2020
When it comes to this year’s election, it’s important to keep a big-picture perspective. Eric Freedman, chief investment officer at U.S. Bank, says economic volatility from public policies tends to be contained within specific industries rather than affecting the general economy. “Usually with political issues, it’s typically not a broad market set of considerations. It tends to be more sector-focused,” he says.
Hainlin says that the healthcare sector, specifically, can show increased volatility leading up to a presidential election. Many of the 2020 candidates are proposing a wide range of reforms; Hainlin believes that volatility within that sector will depend on which Democratic contender wins their party’s nomination.
That said, congressional elections are important here, too. Hainlin notes that healthcare policy is largely driven by legislators, so a change in who controls Congress could determine whether the new president’s healthcare vision becomes a reality.
During the 2020 election, Hainlin also anticipates that the energy sector may see increased volatility, due to the differing regulatory stances of the two parties on domestic energy production. But more than any other policy issue, Hainlin believes trade is one worth watching. He says trade policy will not only be affected by who occupies the White House (given the wide-ranging trade powers granted to the president), but also whether the Senate remains in Republican hands, as Congress has the authority to approve new trade deals.
Once the election is over, Hainlin suggests reevaluating how the policies that are championed by newly elected officials could affect the global economy.
How to weather 2020 — and beyond — with your investments
Keeping an eye on which sectors are most likely to be affected by the presidential election (like healthcare) is smart. But there’s no need to panic about market volatility during election season. Hainlin points out that increased volatility has become more woven into the investing landscape even without the upcoming election — and that it might not necessarily spell bad news, especially when the economy is otherwise sound.
“If it’s uncertainty that causes prices to move widely, then that may also create an opportunity to buy equities,” Hainlin says. Any volatility could be used to meet your “long-term goals at a better price that can potentially give you better-than-average returns over time,” he adds.
While the drama of a presidential election can make your imagination run wild, what you need to watch is ultimately how policies will affect the domestic and global economies. Although a few investment opportunities may arise through an understanding of volatility and performance patterns in election years, Haworth says the best rule of thumb may simply be to stay invested and make sure your portfolio is rebalanced when necessary.
“Returns are made over a full business cycle, which is longer than even one presidential term,” he says. “With presidential elections, you need to make sure to have all the components of a diversified portfolio in place, and then stick to a longer-term strategy that’s designed for more than one election cycle.”