How Do U.S. Presidential Elections Affect Financial Markets?

Published on 12 October 2024 at 13:39

With the U.S. presidential election on the horizon, investors are wondering how it will affect financial markets.

 

Presidential elections are major political events that naturally draw attention, and in close races, anticipation and uncertainty can run high.

This often leads to speculation about how stocks and bonds will react, but history shows that markets are influenced by a broad range of factors—not just election outcomes.

The Market and Elections: Separating Fact from Fear

It’s tempting for investors to believe that presidential elections hold the key to market performance. Should you sell your stocks before the ballots are counted? Or perhaps wait for the election results before making any significant investment decisions? While the outcome of an election may have some short-term impact, it’s important to remember that business fundamentals, not politicians, drive markets.

 

Historical data shows that markets have performed well under Republican and Democratic administrations. Moreover, the broader economic and geopolitical environment—interest rates, inflation, corporate earnings, and global trade tensions—plays a much more significant role in shaping long-term market trends than election outcomes alone.

Market Performance During Election Years

A closer look at historical election years may offer some reassurance. For example, since 1932, the S&P 500 Index has produced positive returns in 19 out of 23 presidential election years. This suggests that election years are not necessarily detrimental to market performance. However, it's not uncommon for volatility to rise in the months leading up to an election as investors grapple with uncertainty.

 

The chart from T Rowe shows that although returns tend to be slightly lower, markets tend to deliver positively:

What History Tells Us About Post-Election Markets

Many investors expect significant market swings after Election Day. Yet history tells a different story: Markets tend to normalise after initial reactions.

 

In the short term, market volatility may spike as investors react to perceived changes in policy direction, but these fluctuations tend to smooth out.

 

This chart from Franklin Templeton shows how volatility rises in the run-up to the election and then drifts away after:

Over the long term, fundamental economic conditions—such as GDP growth, inflation, and corporate profits—are far more critical in determining market performance than the party in power.

Avoiding Emotional Investment Decisions

In the heat of an election cycle, it’s easy to get swept up in speculation and news cycles, which can influence emotional decision-making. However, investment decisions based on short-term political outcomes often miss out on long-term growth. Successful investors focus on business fundamentals, not day-to-day political shifts.

 

The chart below from Franklin Templeton shows that drawdowns during a presidential election year have proven a good entry point for long-term investors, with an average rebound of 24% in the 12 months following the lows:

The Bigger Picture: Key Factors Driving Markets

Ultimately, presidential elections are only one-factor influencing market performance. While they can create short-term volatility, economic fundamentals such as interest rates, inflation, corporate earnings, and geopolitical events will significantly impact over time. Long-term investors are often better off staying the course through election cycles rather than attempting to predict market moves.

Conclusion: Focus on Long-Term Investing

The takeaway for investors is clear: while U.S. presidential elections can create short-term noise, they are not the sole determinant of market performance. History shows that markets tend to recover and follow broader economic trends regardless of who wins the White House. Rather than reacting to political events, long-term investors should focus on maintaining a diversified portfolio and staying committed to their investment goals.

Add comment

Comments

There are no comments yet.