Historic Look At Market Returns In Presidential Election Years
By Maura C. Schauss, CFP® and Todd Youngdahl, CFP®
No matter how divided the headlines make our country seem, there’s one thing on which just about everyone can agree: 2020 has taken us by surprise and the future is still uncertain. We’re not just talking about the pandemic, but the presidential election as well.
This year has brought unexpected economic turmoil, and many of us are hoping there are brighter days ahead. In an election year, when campaign promises are being made and all eyes are on the candidates, it might be tempting to think that a certain party or politician will improve our financial situation. So, how much power do presidents and the election cycle have over our economy?
What History Tells Us
One way to measure the impact of elections and presidents on market cycles is to look backward. For 60 years (from April 1942 to October 2002) there were 15 stock market cycles, each lasting around four years (the same length as presidential terms). Interestingly, the trends don’t follow the specific presidents as much as they do the election cycle of post-election, mid-term, pre-election, and election years. We see that bear markets historically occur during the first and second years of presidential terms. The bull markets kick in during the third and fourth years. The fourth year is also the election year. In fact, a bear market, defined as a decline in the S&P 500 Index of 15% or more over a period of 1-3 years, never occurred during an election year from 1942-2002.
But remember, past performance isn’t always indicative of future results. Case in point: More recent elections have not followed this pattern, especially looking at the Obama and Trump presidencies. Obama’s first two years in office were better for the markets than his third, and Trump enjoyed unprecedented market surges his first three years, only to be derailed by a pandemic.
A Matter Of Timing
But that’s just one view. Because remember, elections don’t exist in a bubble. Regardless of who was in office when, every president experienced different international conflicts, civil unrest, job market fluctuations, or societal changes that also played into stock performance.
Let’s take a look back at Nixon’s time. When he resigned after being threatened with impeachment, there was a sharp drop in the stock market. But was that the cause? Was it dependent on what year it was in the election cycle or what party was in the House or Senate? When that event happened, stocks were already being pulled down by a global oil shock, runaway inflation, and turmoil in the Middle East.
What about Clinton? He also faced impeachment. Did it have the same effect? Hardly. The S&P 500 continued its upward trajectory in spite of the impeachment proceedings. Often it’s the timing that matters more than the name of the person in office. Clinton was president during the tech boom and benefited from how that improved the markets.
A Broad View
This begs the questions: in a year none of us saw coming, how will an election play into market volatility, and is there anything you can do about it? If we’ve learned anything recently, it’s that we can’t predict the future, so we need to focus on what we can control. In this case, it’s your commitment to your long-term plan, discipline to avoid emotional investing, and personalizing your portfolio to your specific risk tolerance and goals.
For a more detailed view, please review Capital Group's brochure A Review of U.S. Presidential Elections.
If you find yourself worrying about the markets or your financial situation, we at Washington Wealth Advisors are here to answer your questions and help you move forward. To schedule a meeting, please call our office at 703.584.2700 or email email@example.com.
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Please note: Historical performance results for investment indices, benchmarks, and/or categories have been provided for general informational/comparison purposes only, and generally do not reflect the deduction of transaction and/or custodial charges, the deduction of an investment management fee, nor the impact of taxes, the incurrence of which would have the effect of decreasing historical performance results. It should not be assumed that your Washington Wealth account holdings correspond directly to any comparative indices or categories. Please Also Note: (1) performance results do not reflect the impact of taxes; (2) comparative benchmarks/indices may be more or less volatile than your Washington Wealth Advisors accounts; and, (3) a description of each comparative benchmark/index is available upon request.