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Election Results & Stock Market Returns
Each time a U.S. presidential election approaches, we revisit with clients our views about the impact on our investment outlook and portfolio positioning. Here is a quick review of how we think about elections in general within the context of a sound investment process.
A (Similar) Tale of Two Administrations
History tells us that the linkage between an election result and a market impact is not always clear. The 2016 presidential election was a perfect example of this, with stocks initially plunging on the surprising result and then soaring in the days after.
Below is a table of market returns during both Republican and Democratic administrations. Notably, there are many non-election variables that impact investment outcomes over merely who wins an election.
The business cycle may be a far more powerful force than politics in driving these numbers. To take just one example, a major driver of stock returns during unified Democratic control comes from the 1992-2000 period, which culminated in the tech bubble. A big drag on Republican equity returns comes from the following Bush 43 term, which was bracketed by the bust of that Tech bubble on one end and the Financial Crisis at the other. As we can see, it is important not to over-interpret politics as the key driver of the business cycle. Economic risks and, as always, starting prices are more telling of future stock market returns than who wins in Washington DC.
Source: Furey Research Partners
Market Performance Around Elections
Election years have sometimes led to downside volatility for the stock market, especially when incumbents lose. However, markets typically rebound strongly from any declines around elections the following year.
For investors with a time horizon longer than a year or two, elections do not have a meaningful or long-lasting effect on investment performance. It will generally pay off to look beyond the election at the other drivers of markets and potentially even to take advantage of election-year declines.
It’s important to note that election and post-election year analyses represent the average result historically, and the sample size is often small. There are many reasons the market could respond differently this year, among them the large amount of economic stimulus, the ongoing pandemic, a quickly rebounding economy, and so on.
Fundamentals Drive Long-Term Investment Outcomes, Regardless of the Party in Power
Instead of betting on election results, we stick to our longer-term process of building portfolios that are durable in any environment. A good investment process must consider multiple macro scenarios and assess the potential risks and returns for numerous asset classes and investments in each scenario. As investors, we expect to experience market volatility and shorter-term downside risk at times. Stock market history makes this clear. The degree will depend on the portfolio’s need for return and the corresponding risk exposure. Experiencing volatility is a necessary evil of owning stocks and other higher returning “risk assets.” They would not be considered risky otherwise!
History shows that the political party in power is not a significant differentiator or driver of investment returns. There are simply too many other factors, variables, and events that impact markets and asset prices over time beyond election outcomes.