From an overwhelming number of political ads to uncomfortable conversations with family members, there is no escaping the gravity of a presidential election. Though you may not know it, even your stock portfolio can be impacted by the impending vote.
Despite positive returns thus far in 2024, analysts and career investors are already pricing in additional volatility surrounding the election later this year. To avoid surprises in your portfolio come November, it is important to understand how stocks have performed during past elections and what you can do to protect your investments.
How have stocks reacted to past presidential elections?
Most presidential election years in the past century have coincided with above-average stock market growth. In fact, the chart below shows that the S&P 500 has only reported negative stock growth in 5 of the 24 election years starting from 1928.
Four of the election years with negative stock results occurred during larger bouts of economic turmoil. First, Roosevelt was elected in 1932 at the height of the Great Depression and again in 1940 following a subsequent recession. Both of these election years coincided with a 15% decline in the S&P 500. Then in 2000, Bush was elected at the height of the Dot Com Bubble and the beginning of the bear market caused by the bursting of that bubble. Unsurprisingly, the S&P 500 fell by 10% that year. Finally, Obama was elected in 2008 at the beginning of the Great Recession and the U.S. experienced the sharpest drop in the S&P 500 during an election year in the history of the index – 39%.
Of the five election years with stock market losses, four of the presidents elected were Democrats and one was a Republican. This begs the question – does the winning political party in an election impact stocks?
Does the president-elect’s political party impact stock results?
On the surface, it appears that the winning political party of a presidential election has an impact on stock results. In years when a Republican president was elected, the S&P 500 reported an average 10.9% gain. On the other hand, when a Democrat president was elected the index reported an average 4.3% gain.
While these results suggest a correlation between political winners and stock gains, there are several outliers that skew the data. In particular, the largest stock market gain in the years studied was 36% in 1928 when Hoover, a Republican, was elected. Conversely, the largest stock market loss was -39% in 2008 when Obama, a Democrat, was elected.
Most people will agree that the stock results in 1928 and 2008 were not caused by the political party that won the election, yet the results were so dramatic that they drastically shift the averages. In fact, when these two outliers are removed from the equation, average stock market returns are much closer for Republican and Democrat presidential winners at 8.5% and 7.9%, respectively.
Why do elections influence stocks?
The CBOE Volatility Index [VIX] – which measures expectations for stock market volatility in the near term – has been an average of 6% higher in election years since 1990 compared to the overall average. So, why are election years perceived as more volatile than others?
In most cases, the president doesn’t have a direct influence on a particular business, or even a sector of the economy. Instead, the presidential election and stock performance are typically based on the overriding economic situation at the time of the election and the candidate’s platform.
To illustrate, consider a situation where the economy is strong, and a political candidate is running on a platform of lowering corporate income tax. When it becomes clear that the candidate will win the election, investors adjust their projections for business profits to account for lower taxes in the coming years. They then trade based on their updated projections and stock prices rise well before the campaign promise is fulfilled – analysts often refer to this information as being “priced in.”
Adjusting Your Portfolio for Election Year
The adjustments you make to your portfolio during the election year – or whether you make any changes at all – should be based on your individual goals. If you are investing for the long-term and your portfolio already reflects your ideal investment mix, you may not need to make any changes to your portfolio.
On the other hand, if you invest to capture short-term stock gains, election year provides a unique opportunity to take advantage of enhanced volatility. An experienced financial advisor who specializes in stock trading can help you identify and capitalize on these opportunities.
Prepare For Election Year Volatility with DreamWork Financial Group
At DreamWork Financial Group, our advisors and analysts can forecast how the upcoming election could impact your portfolio and help you make appropriate changes. Our team specializes in stock trading, and we have vast experience with periods of volatility.
Our innovative wealth management program, Investing Gameplan™, includes a custom portfolio of investments chosen based on your specific needs and an ongoing relationship with a fiduciary advisor who is also your portfolio manager. This unique structure allows us to be nimble and make changes as they are needed to help you achieve your goals.
To learn more about Investing Gameplan™ and get started today, contact us.