How Presidential Election Years Affect the Stock Market
By David K. MacLeod, CFP®, CFA
Election season is in full force here in the United States, but November 3, 2020, still feels a long way away. Between election uncertainty, oil market disruptions, and the spread of the novel coronavirus, stock market volatility has increased dramatically. You may be wondering what to expect from the rest of this presidential election year.
For this article, we’ll set aside the other factors mentioned above and focus on the influence of an election year on the U.S. stock market. As financial planners located in Orange County, CA, we’ve been in business for 10 U.S. presidential election seasons since we opened our doors in March 1984. We have market insights to share that may be relevant for the current cycle.
What History Shows
We want to first stress that we do not advocate trading or market timing based on election forecasts. We also want to discourage following a seasonal investment strategy that moves in and out of the stock market based on historical patterns around elections.
For example, at one time the Presidential Election Cycle Theory was a relatively popular theory proposed by Yale Hirsch, which promoted the tenet that the third and fourth years of a presidential term have the best stock market returns. If you had followed this theory and invested aggressively in 2008 (an election year and George W. Bush’s final year of his presidential term), you would have been more than a little disappointed. No rule says any season or year is the best time to invest.
When we review presidential election history, election results have made no meaningful difference in how the stock market performed. Looking back to 1932, according to Capital Group research, U.S. stocks have trended up regardless of whether a Democrat or Republican won the White House. That said, investing through an election year can be nerve-wracking.
Presidential Primaries and Market Volatility
Market volatility tends to increase during the uncertainty of presidential primaries. Volatility certainly has increased in 2020, as you’ve undoubtedly heard reports on the news of greater Dow Jones Industrial Average point swings up and down.
However, according to Capital Group, patient investors benefit as the U.S. stock market tends on average to perform better than average in the 12 months following the end of the U.S. presidential primaries.
As always, we don’t try to time the markets around election expectations, and again, these are rules that have been broken.
Have a Sound Investment Strategy
Whether President Donald Trump is re-elected or another candidate in the race wins the White House, we wouldn’t recommend making dramatic changes to a sound investment plan. If you don’t feel confident in your current plan, feel free to call us to speak with a CERTIFIED FINANCIAL PLANNER™ (CFP®) professional.
Schedule a 15-minute discovery call with a fee-only financial advisor.