Before diving into this market commentary, I believe it is crucial that we begin with the bottom line first. Markets fluctuate for numerous reasons, but investors often focus on just a few, like how a presidential election will impact the markets.
While markets may react to certain presidential policies, investors tend to place a disproportionate emphasis on the elections themselves. While several factors influence the markets (like inflation, global affairs, interest rates, unemployment, etc), investors often try to wrap up these factors into one candidate and then predict where the market will head based the expected election’s result.
As Yogi Berra said, “It is difficult to make predictions, especially about the future” This wisdom is particularly applicable to market predictions. Making forecasts about market movements is a challenging exercise that proves most investors either wrong or incredibly lucky. While constructing market outlooks based on who takes over the oval office can be an interesting exercise, do not get caught up in the noise.
The next few sections of market commentary will objectively display S&P 500 data with Presidential election years. This is not meant to be interpreted as an opinion piece, nor to speculate what will happen if either candidate wins. This is just a presentation of data. Keep in mind that past performance is not an indication of future returns.
A History of Election Years
Here is brief overview of the history of election years.
Positive Trend: Of the 18 completed election years, 15 ended positively, while only 3 (1960, 2000, 2008) saw declines.
Average Return: On average, the S&P 500 has risen about +7% in an election year.
2024 Performance: Notably, 2024 is shaping up to be one of the best performing election years for the market. Through October 18th, only the year 1980 had performed better at this point in the year.
The chart below shows the year’s fluctuation of every election year since 1950. The bolded black line is 2024, which is tracking to be one of the best performing years for an election year.
Source: Chart created by Canterbury Investment Management using S&P 500 data dating back to 1950
Post-October Performance in Election Years
Given that today is October 21st, with 2.5 months left in 2024 and the election still ahead, it's worth examining how markets have historically performed in the final months of election years:
Directional Split: From October 18th through year-end, the S&P 500 has risen 11 times and fallen 7 times in previous election years.
Average Up/Average Down: When the market has risen during this period, it has gained an average and median of about 6.3%. When it has declined, its average and median loss has been about -1.2% through the end of the year.
Elected Party: Since 1950, 10 elections have resulted in the opposing party taking the oval office, while 8 elections have kept the incumbent party in office. Markets tend to end the year a little stronger on average when the party flips, whether from Democrat to Republican or Republican to Democrat. The median rise to end the year for a change in party is +5.34%, while the median rise for no change is +0.34%.
The Year Following an Election
How did the markets perform in the year following the election? The results are mixed and, given the small sample size, should be interpreted cautiously:
Return and Volatility: The year that follows an election has historically risen +8% on average. However, in the 18 samples of data, 6 of the years were down more than -10%, and 6 of the years were up more than +20%.
Elected Party: Markets tended to perform better the following year when the incumbent party remained in office, rising an average of 12% (18% median return) compared to 4.9% (0.31% median return) when the opposing party won.
Major Caveats
Sample Size: While the S&P 500 was officially introduced in 1957, data on the index dates back to 1950. Since 1950, there have only been 19 Presidential elections. That is simply not enough data points to draw any meaningful conclusions. There are numerous factors beyond elections that influence market behavior.
Data Trends: The 4 most recent post-election years (2009, 2013, 2016, 2020) all saw returns above 18%, while every post-election year from 1969 to 1981 saw declines of at least 10%.
The Change in Party isn’t Relevant: While results showed stronger markets when the incumbent party won, recent elections contradict this trend. The two most recent post-election years (2017 & 2021) saw a change in office but also saw significant market gains (18% in 2017; 29% in 2021). Conversely, the worst-performing post-election year was 1973 (-18%), when the incumbent party remained in office.
And here is the biggest caveat of them all: past performance is not indicative of future results. What happened in previous election years has no bearing on what may or may not happen in the future.
Bottom Line & Meaningful Conclusions
With only 19 presidential elections since 1950, we have an insufficient sample size to draw statistically significant conclusions about an election’s impact on the market. While it's important to stay informed about political developments, avoid making knee-jerk investment decisions based on short-term political events or predictions.
Instead of trying to predict market movements based on election results, investors should focus on the realities of right now. Most economists would agree that markets lead the economy, not the other way around. Right now, markets appear to be in a healthy position, “crawling a wall of worry.” Our bottom line two weeks ago concluded:
The general feeling right now is that investors are worried about the upcoming election and what impact it may or may not have on the markets. As shown by the sentiment survey, most investors are proceeding with caution yet remain optimistic. Right now, markets are not reflecting any emotional environment. That could change but has not happened yet. Market participation has been strong, and a rising tide is lifting most ships. – “Markets are Demonstrating Cautious Optimism,” Canterbury Investment Management, Oct 7, 2024.
If market conditions change in the next few months, Adaptive Portfolio Management is designed to rotate and adapt its holdings to whichever market environment comes next-bull or bear.
Originally published October 21, 2024
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