Elections & Stock Market Returns

5 Lessons from 91 Years of Data

The election is coming up here in the US. There is a lot of fear from the left about what might happen if Trump gets re-elected. And there is equal (probably more) fear from the right of what might happen under a Biden/Harris administration.

Rather than leave ourselves at the mercy of our own imaginations or the talking heads, let’s see what the data says.

Lesson #1: Stocks usually go up regardless of whether it’s an election year or not; therefore, any time spent out of stocks ends up being pretty costly

From 1928 to 2019, stocks averaged 11.9% per year. In election years, stocks averaged ever-so-slightly less at 11.6%. In non-election years, stocks averaged 12%. The chart below shows returns each year since 1928 with the election years in blue and non-election years in grey.

Chart created by the author. Data source: CAGR of the Stock Market: Annualized Returns of the S&P 500. http://www.moneychimp.com/features/market_cagr.htm. Accessed 16 Oct. 2020.

The data suggest that election years are slightly worse for stocks, but even that might be a stretch. For example, if we simply remove 2008 the results change substantially. In the non-2008 election years, stocks actually did better than average - going up 13.9%.

Experiment: Going to Cash in Election Years

The point is that election years don’t appear to be any worse for your portfolio than non-election years. Let’s run a little experiment to see how this impacts your portfolio. Let’s assume you were to invest $100,000 in 1928. Under one scenario, let’s say you remain invested 100% of the time. In the second scenario, let’s say you went to cash for the entirety of each election year.

How would each portfolio have done?

A $100,000 investment in the S&P 500 in 1928 grew to $6.15 million by end of 2019. If you had simply gone to cash every election year, you would have ended up with…

(drumroll, please)

$655,000.

Chart created by the author. Data source: CAGR of the Stock Market: Annualized Returns of the S&P 500. http://www.moneychimp.com/features/market_cagr.htm. Accessed 16 Oct. 2020.

By simply skipping election years (when you think politics will ruin the market), your returns would have been 10x lower.

Lesson 2: The Party in Charge Doesn’t Matter

There is a narrative out there that Republicans are more pro-business than Democrats. Therefore, you might expect the market to perform better under them. However, that hasn’t been the case. From 1853 to 2015, the average returns of stocks has been basically even under both Democrats and Republicans.1

Democrats actually have had a slight edge, particularly in recent years. Since 1960, US economic growth has actually been 1.8% faster under Democrats than Republicans. So are Democrats better for markets and economies than Republicans? Not necessarily.

Most of the difference in growth over that time period was the result of things outside of the President’s control. One study suggests as much as 70% of this difference is due to oil price shocks, of which the President has little to no control. Another 22% of the gap (0.4% annually) was attributed to increased economic spending following the Korean War. None of the differences in economic growth rates was attributable to either fiscal or monetary policy.2

Let’s just look at the presidency of Bill Clinton and George W. Bush to see how market performance under each was influenced by forces outside of their control.

Clinton was president during the Great Technology Bubble of the 1990s. Stocks increased by 17.2% annually under his watch; however, much of that gain was in the Technology sector, which he had virtually nothing to do with.5 As George W. Bush came into office, that Bubble was already in the early innings of popping. As it did, the US economy fell into a short recession. Again, that had nothing to do with Bush nor did it have anything to do with Clinton. Yet, the difference between the two Presidencies in stock market terms was greatly reflective of that.

If Clinton had remained in office just one year longer, the results from his term would be far worse and the results from Bush’s term far better. Therefore, timing and external conditions outside of politicians had far more to do with returns than the underlying policies. I’m not suggesting they are irrelevant, but data suggests they are far less relevant than the news would have you believe.

Lesson 3: Expert predictions about the impact of elections on markets are wrong (as usual)

The talking heads on CNBC might have you believe a Republican or Democratic victory would spell doom for society. These predictions aren’t anything new. Finger-pointing has been a staple of US politics for decades. And, as usual, most of the predictions fail to materialize. Let’s just take a look at the last few Presidential administrations to see how bad these predictions often turn out.

2008 Narrative: Obamacare would ruin the Healthcare sector

On March 23, 2010, the Obama administration and US Congress passed the Affordable Care Act into law. Many predicted this would lead to the great demise of healthcare stocks, particularly those in the insurance sub-sector. The reality was quite different. Over the next 2.5 years, health insurance stocks (such as UNH) produced just under 98% compared to just 52% for the broader market. 6

2012 Narrative: Obama’s economic policies would end capitalism

After the Great Financial Crisis and massive debt-driven stimulus, the economy was recovering. In 2012, President Obama’s re-election was speculated to destroy capitalism and the American economy.

Instead, he presided over the longest period of economic expansion in US history and the longest bull market in US stock market history. That result was likely more to do with the market he inherited in 2009 (and lowering interest rates), but the point is that Obama being president didn’t ruin life as we know it - no matter how much Republicans may argue otherwise.

2016 Narrative: Trump’s election would be bad for the stock market

It was widely expected that Hilary Clinton would win the 2016 election. If Trump were to win, many thought the market would crash and we would end up in an economic recession. Just take a look at some of these headlines in the six months leading up to the 2016 election:

  • “The work of two economics professors may provide a glimpse of how the stock market might react if Donald Trump were elected. They studied the predictions market, including PredictIt.org and the reaction in the financial markets to events around the election. One of the economists says their findings point to a sharp immediate sell-off if Trump wins and a slight rally if Clinton wins.”7

  • “Donald Trump promised he would “jump-start America” with little difficulty during his economics speech in Detroit. Although if he is elected, he’s more likely to stall the economy, according to St. Louis-based Macroeconomic Advisers. The Republican businessman as president, the economic forecasting firm say, could wipe a hefty $2.1 trillion off the S&P 500.”8

  • “Trump isn’t just bad for his business. He’s not even just a danger to the U.S. economy. Investors around the world think that a President Trump would be disastrous for global markets. And now, there is hard data to prove it, thanks to two clever economists and one debate meltdown.”9

As a Trump victory become more apparent the night of the 2016 election, the stock market futures declined by 5%. Yet, as the shock wore off, the market then rallied. The day after the election, stocks had gone up 6% from their night lows and ultimately went on to generate 14% returns from 2017–2019.

Ultimately, Trump’s presidency did not wreck the stock market. What did wreck the market during Trump’s term was a global pandemic that completely shut down the economy; something that neither Trump nor Clinton could have done anything about.

Lesson 4: The 299,999,999 are greater than the 1

Every politician wants you to believe that they are the savior of the world. The other person is the greatest threat to civilization. You must vote for them or the country will be flushed into the tubes and hundreds of years of progress will be wiped out. Rubbish.

There are 300 million people in America. What matters far more than the 1 person sitting in the White House? The individual actions of the other 299,999,999 matter more than the 1. Capitalism depends on those workers to develop new products, find ways of making things more efficient, and serving the needs of the rest of their fellow human beings.

Innovation drives stock prices more than the White House. Consider all of the different technological innovations that have occurred under each president since 1960:

  • John F. Kennedy (1961-63): The communications satellite, audio cassettes, and light-emitting diode (LED)

  • Lyndon B. Johnson (1963-69): Artificial heart, computer mouse, and bar-code scanner

  • Richard Nixon (1969-74): Floppy disk, liquid-crystal display (LCD), first video game

  • Gerald R: Ford (1974-77): Laser & ink-jet printers, Post-It notes, liposuction

  • Jimmy Carter (1977-81): Magenetic Resonance Imaging (MRI), Walkman

  • Ronald Reagan (1981-89): Digital cell phones, Prozac

  • George H.W. Bush (1989-93): World Wide Web & Internet, Digital answering machine

  • Bill Clinton (1993-01): Personal GPS widely available, HIV protease inhibitor, Google

  • George W. Bush (2001-09): iPod & iPhone, Hybrid car, Facebook, Blu-rays

  • Barack Obama (2009-16): 3D printing, Android, iPad

Any single of those inventions is worth 1,000x more than the combined policies of every president over that entire period.

Researchers found that the tech giant Apple was more of a force in the market than the White House. Apple’s products stimulated the US economy with 2 million jobs. Its “app economy” alone has led to the creation of 1.5 million US jobs and earnings of more than $16 billion for US developers. The efficiency in small businesses is another boon. 94% of small businesses use smartphones, which saves them an average of $65 billion in productivity.10]

Lesson 5: The Greatest Influence of Your Financial Future is Not the President, It’s You

What can you control about the election? Not much. What can you do about your financial future? Quite a bit, actually.

Vote

What can you really control with the election? Pretty much nothing other than go out and vote for your candidate. The rest is basically out of your hands. So get to know the policies of each candidate and choose which one reflects best your morals and ideals. That’s all you can do.

Save More

You can also control your savings rate. If you have a $100,000 portfolio, a 10% decline due to politics would cost you about $10,000. You could make up for that “loss” by simply saving an additional $7.36 per month. Assuming you earn an 8% return, you would end up with an additional $10,000 in 30 years. Chances are, the presidential election’s impact on your portfolio is likely to amount to less than the cost of Netflix. And that assumes the 10% decline is never reversed, which ultimately is not likely to be true.

Improve Your Portfolio

You can also focus on improving your investment portfolio. Perhaps allocating your assets in a more intelligent way could boost your returns by a few percentage points over the next couple of decades. Maybe finding a better ETF could add a 0.5% return. Or if you buy individual stocks, perhaps spending a few more hours on research. Increasing your investment returns by even 0.5% per year would overcome any damage that a politician could do and then some.

Take Back Your Time

In fact, the most costly thing a politician could do to you is probably consuming your time and creating anxiety. Every hour you spend thinking about the election (beyond who you are going to vote for), worrying about this candidate or that, or watching news coverage of the election is time that you aren’t spending doing other, more valuable things such as:

  • Focusing on your education - formal or informal - to advance your career and earn more money.

  • Starting a side business to earn a few extra dollars that you could invest.

  • Focusing more on your relationships with God, your friends, your wife, your husband, your kids.

  • Reading a good book.

  • Mailing an encouraging note to someone.

The time spent watching election coverage will raise your blood pressure more than your portfolio, so turn off the TV. And guess what will happen? You will find yourself worrying less about the election. And you’ll have more time to devote to the things that truly make a difference in your financial situation and, more importantly, your happiness.

Have a great weekend everyone!

Nathan


  1. Sources: Global Financial Data, 1853–1926; Morningstar, Inc. and Ibbotson Associates thereafter through 2015  ↩

  2. Blinder, Alan S. and Mark W. Watson. “Presidents and the U.S. Economy: An Econometric Exploration.” Princeton University, July 2015.  ↩

  3. “10 Things You Should Know About Politics and Investing.” Hartford Funds, 17 Aug. 2020, www.hartfordfunds.com/practice-management/client-conversations/10-things-you-should-know-about-politics-and-investing.html. Accessed 9 Oct. 2020.  ↩

  4. Morningstar Direct, 1/16. “A Campaign for Your Future.” Hartford Funds (2016). Accessed on 9 Oct. 2020 from: https://www.raymondjames.com/northcoastadvisors/pdfs/resources.pdf.  ↩

  5.  ↩

  6. “Health Care Stocks: Performance under Obamacare - Obamacare - ProCon.Org.” Obamacare, 28 Feb. 2020, healthcarereform.procon.org/health-care-stocks-performance-under-obamacare/. Accessed 9 Oct. 2020.‌  ↩

  7. Domm, Patti. “This Is What Could Happen to the Stock Market If Donald Trump Wins.” CNBC, 3 Nov. 2016, https://www.cnbc.com/2016/11/02/this-is-what-could-happen-to-the-stock-market-if-donald-trump-wins.html.  ↩

  8. “Here’s How Much the Stock Market Could Plunge If Trump Becomes President.” Fortune, https://fortune.com/2016/10/06/donald-trump-stock-market-2/. Accessed 16 Oct. 2020.  ↩

  9. Thompson, Derek. “Investors Think President Trump Would Wreck the World Economy.” The Atlantic, 24 Oct. 2016, https://www.theatlantic.com/business/archive/2016/10/donald-trump-business/505097/.  ↩

  10. “A Campaign for Your Future.” Hartford Funds (2016). Accessed on 9 Oct. 2020 from: https://www.raymondjames.com/northcoastadvisors/pdfs/resources.pdf  ↩