Election years are eventful, with political debates and campaign promises dominating the headlines. For many investors, election season can create anxiety, especially when both sides of the political aisle claim that their opponent’s victory will lead to economic turmoil. However, the reality is that the stock market has historically proved resilient, regardless of which party is in the Oval Office.
If you’re concerned about what to expect from the stock market after this election, you’re not alone. While past performance is no guarantee of future success, history paints a more positive picture that can help reduce investor anxiety. Read on to understand how the market has performed following Election Day.
Stock Market Strength Through Election Years
Over the years, we’ve seen that the stock market tends to stay in positive territory during presidential election years. Since 1952, the S&P 500 has posted an average gain of about 7% in election years. While that number is slightly lower than the average return of around 10%, it still shows that markets generally trend upward, regardless of who wins the presidency.
Source: Dimensional Fund Advisors, “How Much Impact Does the President Have on Stocks?” 26 August 2024, https://www.dimensional.com/us-en/insights/how-much-impact-does-the-president-have-on-stocks.
Of course, there have been exceptions. Since 1928, four election years have ended with the market in negative territory. These downturns were tied to crises like the Great Depression and the financial crash of 2008. This tells us that, while elections may bring short-term volatility, they have not forced long-term market declines.
Source: Dana Anspach, “Stock Market Performance in Presidential Election Years,” The Balance, updated 13 March 2022, https://www.thebalancemoney.com/presidential-elections-and-stock-market-returns-2388526.
Elections Aren’t the Biggest Market Drivers
It’s easy to assume that a presidential election will hurt your portfolio, but other conditions generally shape the market’s long-term performance. Whether it’s inflation, corporate earnings, or interest rates, these factors play a bigger role in driving stock market outcomes than the results of an election.
Interestingly, the S&P 500 has risen under both Democratic and Republican leadership. From 1930 onward, the average annualized return has been around 9.6% with a Democrat win and 5.7% with a Republican victory. But when you extend the timeline 10 years out, the difference has evened out.
This highlights the fact that, over the long haul, the market has moved forward no matter who holds office.
Short-Term Market Swings Are Common
Even though long-term trends tend to be stable, it’s common for the stock market to experience temporary dips and spikes leading up to the election. The uncertainty can cause volatility, as investors react to political developments and speculate on potential outcomes.
However, this volatility has historically calmed down within two months following Election Day. So, while the market might experience some ups and downs in the near term, these reactions have been typically short-lived.
How to Keep Your Investments on Track
Given this context, what’s the best strategy for managing your investments during and after an election? Here are a few principles to keep in mind:
Diversify your portfolio: A well-diversified portfolio helps reduce risk, especially during periods of uncertainty. Spreading your investments across different asset classes can smooth out the impact of any short-term volatility.
Stay focused on your long-term goals: Trying to predict short-term market movements based on elections is not a winning strategy. Instead, stick to your financial plan, which should be built around your long-term objectives.
Control what you can: While you can’t control the election outcome or market swings, you can control your actions. Stay disciplined with your investing habits, and don’t let short-term noise distract you from your bigger financial picture.
Consider speaking with a financial advisor: If you’re uncertain about how to navigate election-related volatility, working with a fiduciary wealth advisor could help. They can offer tailored advice and keep you focused on your goals, even when the market gets bumpy.
Final Thoughts
Although elections can stir up market jitters, the stock market has historically proven to be resilient. Temporary volatility around election time is normal, but it has generally subsided quickly, and the market has continued to follow its overall upward trend.
By staying focused on your long-term goals, maintaining a diversified portfolio, and keeping a level head, you’ll be better equipped to handle any market fluctuations. And if you’re feeling unsure, a fiduciary financial advisor can help guide you through the process and align your investment strategy with your financial goals.
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