Elections and markets: Election years.

Impact of Election Years on the Market: A Historical Analysis

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The impact of the elections on the markets.

On the night of November 8, 2016, the entire world was on edge. The presidential elections in the United States promised to be a close contest between Hillary Clinton, the favorite, and Donald Trump, the disruptive candidate. As the hours passed, uncertainty gripped the markets.

Initially, polls and experts predicted a Clinton victory. But as the results began to come in, something unexpected happened: Trump started winning in key states. U.S. stocks plummeted by as much as 5%, reflecting the fear of the unknown.

When Trump’s victory was confirmed, the markets, instead of continuing to fall, began to rebound. Investors, feeling more at ease, were betting on a future of tax cuts and fewer regulations. What started as a night of panic turned into an unexpected recovery, making it clear that in the world of politics and finance, it is very difficult to predict the short term.

Leaders often take credit for the stock market’s good performance, attributing it to their management (as long as the stock market goes up, of course). However, the reality is much more complex, and the impact of elections is usually short-term.

Historical data suggests a more reassuring reality: presidential elections have not had a drastic impact on average market returns. In fact, in the first half of 2024, the S&P 500 yielded over 15%, in an uncertain political environment and with much speculation about the possible candidates. This suggests that, at least so far, the market has focused on other data rather than the elections.

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The role of policies in markets.

The stock market rises and falls regardless of which party is in power. From 1928 to 2020, out of the 24 election years considered, 20 recorded positive returns for the S&P 500. The few exceptions occurred in the context of significant historical and economic events.

Source: Bloomberg, EWA LLC

In 2016, when Donald Trump was elected, the S&P 500 showed a return of 12.00%, while in 2020, with the election of Joe Biden, the index had a return of 18.39%. Multiple factors could have affected these returns, such as the economic recovery resulting from the monetary stimulus in 2020 to combat the COVID-19 pandemic, initiated by the incumbent president.

It’s not that who wins the White House doesn’t matter; depending on the winner, there will be different policies, reactions, and unforeseen consequences. However, you can’t predict what will happen to the market or the U.S. economy based solely on who wins Congress or the presidency. There are many factors that can impact market returns in any given year.

Although election years in the United States may seem volatile and uncertain, historical data suggests that investors should not be overly concerned about the immediate effects of presidential elections. The key remains a well-diversified investment strategy and a long-term focus.

A coincidence that seems to repeat itself throughout electoral cycles is that the largest number of returns appear to come from the third year of a presidential term, or the pre-election year.

Source: Bloomberg, EWA LLC

On the other hand, a divided Congress, although it seems like an obstacle to major changes, reassures the markets. Why? Because when both political parties are at an impasse, changes happen more slowly or, in many cases, do not happen at all. Investors prefer stability over uncertainty. According to data from YCharts, since 1950, the best periods for the S&P 500 have occurred when Congress is divided (or when the president is a Democrat and Congress is controlled by the Republicans). It seems that a balance of power is one of Wall Street’s best friends.

Source: YCharts

Similarly, it is important to remember that the market performance data used in this study dates back to 1928, and that during this period only 24 presidential elections have been held; which we do not consider to be a significant sample size to draw statistically significant conclusions. Many variables play important roles, and political changes seem to be just another one of them.

Conclusion

Our opinion: Given the proposals of both candidates, we believe that a Trump victory would benefit the markets in the short term, especially if the Republicans achieve a victory in Congress. On the other hand, a victory for Kamala Harris would not mean a destruction of value in the markets, and we do not believe that it is a sufficient reason to withdraw investments. For us, the main focus should be on the state of the economy and its companies.

It is a costly mistake to confuse our political desires with our financial decisions. We have no opinion on who will win, as predicting an election is not our area of expertise. We are observing the election betting market with interest, but it is too early to make clear predictions.

September 11, 2024

In our next broadcast, we will discuss the impact on the market of one candidate’s victory over the other and the details of their proposals.

Disclaimers:

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Evolution Wealth Advisors LLC has prepared this presentation as a service to its clients and readers. This presentation provides general information and does not constitute any form of advice or recommendation (including, but not limited to, legal advice). Evolution Wealth Advisors LLC has made a reasonable effort to collect, prepare, and provide quality information and material, but it does not guarantee the accuracy, completeness, or timeliness of the information contained in this letter. Users of any material provided by Evolution Wealth Advisors LLC do so at their own risk and acknowledge that this information should not be relied upon when making (or refraining from making) a specific investment or other business or personal decisions (professional advice should always be obtained before making such a decision). In no way shall EVOLUTION WEALTH ADVISORS LLC be liable for any claim related in any way to its inability or failure to conduct such research or to conduct such research in a proper or complete manner, even if it has the assistance of EVOLUTION WEALTH ADVISORS LLC.