How Will the Presidential Election Affect My Portfolio?

It is a question that clients ask us every 4 years.  Although we all have our opinions about the current race, a historical analysis may be the best way to put some perspective on the situation.  The following are some interesting facts about past presidential elections and how this may affect us in 2020.

1. Although the stock markets react more positively to a Republican president-elect, over their time in office Democratic presidents have benefited from superior market returns (period 1950-present):

2. Incumbents are strongly favored to win re-election and have done so 75% of the time since 1932. However, when a recession has occurred during their time in office the opposing party has prevailed.  Calvin Coolidge’s victory in 1924 was the only exception in the last 100 years. What can we expect this year?  In the second quarter of 2020, the US was in the throws of the deepest recession since World War II with GDP down 31%.  Due largely to the infusion by the Fed of $3 trillion into the economy, activity started to rebound in Q3, and the unemployment rate began to drop.  Technically, these improvements signaled an economic end to the recession, but for many Americans, it feels like it has continued, and this may influence their vote.

3. The stock market activity in the three months from August through October 31 of an election year can be a particularly good predictor of the Presidential Election. Since 1950, if the S&P 500 increased the incumbent party won 82% of the time.  If the stock market fell, the incumbents lost 86% of the time.  To date (through 10/15/2020) the S&P 500 was up 5.7% which would normally indicate an incumbent victory.  However, the stock market is not the economy at large.  “The unique circumstances around this year’s pandemic seem to add plausibility that this could be the first time in almost 100 years that this signal may be wrong—especially if the stock market and economy continue to recover between now and Election Day,” Ryan Detrick (LPL financial chief market strategist).

4. The 4th quarter of a Presidential Election year has generally seen a spike in the stock market. Since 1896 the Dow has been up an average 4.6% in this quarter – a strong end to the year.  However, if the election is contested and the results are delayed, there could be downturn.  The Bush-Gore contest of 2000 shows the negative effect of the uncertainty when the market went down -8.4% from election day on 11/7/2000 until Gore’s concession on 12/15/2000.   What can we expect this year? It would not be surprising to see volatility in the market until the results of the election are finalized.  Thereafter, we may see an uptick into year-end.

5. Based on the S&P 500, Democratic Presidents have seen average US equity returns during their tenure of 14.5% vs 8.3% for Republican Presidents from the period 1993-2020. Interestingly, Emerging Markets Equities perform better under Republican Presidents (+8.3%) vs. Democratic Presidents (+7.1%).  If we extend the period and look back to 1900, the Dow was up an average of 9% per year under a Democratic control vs. 6% per year during a Republican administration.

6. Since 1938, the stock market has gone up regardless of which party has won the presidency. This suggests that over the long run, the market returns are not highly correlated to which party controls the White House. What does this mean for your portfolio?  It is best not to overreact to which party wins or loses; keep focused on your long-term objectives.

7. When the house and senate are divided the average stock market returns are just 5% vs. 16.9% when one party controls both the White House and Congress and 15.6% when one party is in the White House and the other controls Congress. Takeaway: focus on the congressional election results.  These may be better predictors of what may be forthcoming.

Our advice? Remember that your portfolio is based on long-term trends, company earnings, productivity, and the economy.  Do not allow election jitters to influence your investment actions.  There will be volatility in an election year, but this may be a buying opportunity rather than something to be feared.