From Ballots to Portfolios: Unraveling the Relationship Between Elections and Markets
Presidential election years often bring a whirlwind of emotions and uncertainties, not only in the political landscape but also in the realm of financial markets. Investors are frequently caught in a conundrum, grappling with the dilemma of whether to alter their investment strategies amid the volatility that accompanies these pivotal periods.
Historically, the relationship between presidential elections and market performance has been a topic of intense scrutiny and debate. While it's tempting to make knee-jerk reactions or adjust investment portfolios based on the political climate, it's crucial to approach this with a clear understanding and a long-term perspective.
A Caution When Dissecting the Markets
When you begin to dive deeper into analysis, it is easy to begin to draw broad conclusions based on a few initial insights when the true nature of the relationship is much more complex. When looking at the overall stock market and the economy over a long period of time, one cannot simply sum up success or failure based on a singular metric particularly when there are numerous outside factors at play.
No president or congress inherits the exact same economic, social, global, or technological advancements during their terms. Each sitting body of government deals with crisis, whether geopolitical tensions, outright wars, economic shocks, or disasters. Would you rather have been president during World War II or president during the 1990’s when the computer age and internet took off? Should a president be responsible for a looming disaster that comes to fruition at the beginning of their presidency?
No sitting body sets 100% of the rules and laws at the beginning of their term. While landmark changes to how the system works do occur, they are rare. Instead, most continue the laws of the land for some time making tweaks and adjustments along the way. Additionally, one Republican president might govern differently than another Republican president. While they are of the same broad party, the policies and approach may differ.
How The Markets Perform Under Presidents - The Long View
Over various presidential terms, the markets have demonstrated a consistent trend of long-term growth despite short-term fluctuations. Historical data showcases that, over time, the stock market has generally exhibited an upward trajectory across different administrations, reflecting the resilience of the economy and its ability to adapt to changing political landscapes. While specific policies and geopolitical events may trigger short-lived market volatility, the overall trend indicates that economic expansion, technological advancements, innovation, and global economic factors have been primary drivers behind the market’s upward movement.
The interactive chart below shows the cumulative growth of a $100 investment made in 1928 to 2022 under each president. Click on each one to learn more!
Dynamic chart from Dimensional
All Right... Time for the Data to Confess
Remember my earlier caution about dissecting data and drawing conclusions from it. The following data is inspired from some of my favorite charts and tables as they relate to the markets and politics. I am not endorsing any political views as I am a firm believer the markets move in spite of rather than because of politics.
On Presidents
What have been the average returns for each Presidential Party during office?
Elected To Office
to
End of Elected Term
The following charts measure total return in nominal terms and inflation adjusted starting in November, when a new president was elected, and ending in October before elections again in November, four years later.
For example, President Trump was measured from November 2016 to October 2020 and President Obama was measured from November 2008 to October 2016.
Nominal
Inflation Adjusted
Elected Into Office + 1 Year
to
End of Elected Term + 1 Year
While these are interesting, a new President cannot begin to influence policy until they are officially in office and even then, it takes time for new policies to take shape. The following charts add in a 12 month lag to the measuring total return.
For example, President Trump was measured from November 2017 to October 2021 and President Obama was measured from November 2009 to October 2017.
Nominal
Inflation Adjusted
What is the Best Year to Invest during a Presidential Term?
If you were to choose which year to invest in a presidential term, on average, the 3rd year in both parties tends to be the best year.
Presidential Stature - A Curious Anomaly
On average, Presidents over 6 feet tall have exhibited an annual return of 16% with a standard deviation of 17% over 48 years, while those under 6 feet tall have shown an annual return of 7% with a higher standard deviation of 22% over 42 years. This curious data hints at a potential link between physical stature and presidential success, adding a whimsical perspective to the evaluation of leadership.
| Height | Average Annual Return | Standard Deviation | Number of Years |
| Presidents 6’ and Over | 16% | 17% | 48 |
| Presidents Under 6’ | 7% | 22% | 42 |
From How Do Presidential Elections Affect The Markets? | RR (retirementresearcher.com)
On Congress
Of course, the President does not act alone. The President’s ability to influence policies and the economy greatly depends on the composition of Congress. Whether the majority party in both houses of congress aligns, are split, or is different from the President’s own party determines whether the President’s agenda is passed or not.
So let’s look at Congress and see what we can glean from the data there.
Average Annual Returns for The House of Representatives
Nominal
Inflation Adjusted
Average Annual Returns for The Senate
Nominal
Inflation Adjusted
Presidents, House, and Senate Working Together... Or Not
If the Executive Office and Congress have to work together to get things done, what is the best combination of President, House, and Senate?
The following chart summarizes performance by each combination in nominal terms measuring from January to December. I have not calculated any lagging effects or election dates here.
In the key below, P = President, H = House, S = Senate
You may also note the large outlier of 32.8% return with the President being Democratic, House being Democratic, and Senate being Republican. This only happened once since 1926 for a period of just 1 year – 1980. In 1980, Jimmy Carter finished out his presidency being defeated by Ronald Reagan, Mount St Helens erupted, and inflation was over 13% for the year. Oil prices were still high and the US officially entered a recession.
The worst outcome, Republican President-Democratic House-Republican Senate was largely influenced by the Great Depression where the annualized return was -37%!
Interestingly, there has been no time since 1926 where we’ve had a Republican President and House but a Democratic Senate.
Summary
This piece delves into a thorough analysis of market returns under various political scenarios. Attempting to formulate an investment strategy based on who holds political office is challenging due to the complex and unpredictable nature of the economy and political environment. For investors with a long-term perspective, the influence of politics on your portfolio may not be as pronounced as it appears.
While these charts are interesting, the essential takeaway is that, for the majority of combinations, the outcomes were positive on an annualized basis, emphasizing the value of staying invested. As I always say, your portfolio should be properly invested according to your goals, risk preferences, and risk capacity regardless of what is happening externally in the news headlines. It’s this consistency that marks a successful long-term investor.
Notes on Returns and Timeframes
Returns Data: The following numbers are total returns for the total US stock market (large down to small companies) generated from Dimensional’s Returns website. The returns are monthly starting in January of 1926 ending in October 2023 for the total stock market index.
Election to Election: There is often a lag between when an elected official is voted in an when they actually take office. I attempt to capture this for Presidential returns (November to October) but not for congressional returns.
Administration Years: Administration years for Presidents run January to December although the President doesn’t take full office until the 20th of January.