Presidential elections are not only significant events that impact the political environment in the United States, but they also have notable impacts on the market landscape. The question is, what are the exact implications of presidential elections on the stock market? In this article, we will take a deep dive into historical trends, patterns, and recent election metrics to better navigate election year markets as investors.
Market Behavior: Presidential Impacts
The chart below illustrates the S&P 500’s performance during various presidencies dating 1961 to 2024, from Kennedy through Biden.
(YCharts, 2024)
Key Highlights:
- The S&P only saw two negative presidency returns: Richard Nixon (-19.8%) and George W. Bush (-36.7%).
- During Bill Clinton’s tenure, the S&P saw its highest growth with a +208% increase.
- Kennedy to Clinton (1961-1969): The S&P 500 saw steady growth, increasing by 19.5% under Kennedy and 46.6% under Johnson.
- Nixon to Carter (1969-1981): Market volatility characterized this period. The market fell significantly during Nixon’s term by -19.8%.
- Reagan Era (1981-1989); Reagan’s presidency saw a +117.9% market increase, reflecting the economic expansion driven by tax cuts, deregulation, and a growing economy.
- Clinton Boom (1993-2001): The stock market surged +209.8% during Clinton’s presidency, driven by economic prosperity and the tech boom of the 1990s.
- Bush to Obama (Post-2000 Volatility): George W. Bush’s presidency was the largest decline in the S&P due to the 2000 dot com bubble and the 2008 financial crisis.
- Trump to Biden (2017-2024): Donald Trump saw a +67.3% increase in the stock market, driven by corporate tax cuts and deregulation. Under Biden, the S&P 500 rose +41.8% as of mid-2024, powered by economic recovery from the pandemic and fiscal stimulus.
Historical data supports that the stock market can perform well under both parties, but specific economic conditions, policies, and unforeseen events tend to have a larger impact on market movements than party affiliation alone.
Historical Trends: Election Cycle and Market Behavior
The market typically responds to the uncertainty that comes with elections and investors are often hesitant to make significant moves until the results are clear. Historically, the stock market has followed distinct patterns surrounding presidential elections. A study by the Stock Trader’s Almanac highlights the “Presidential Election Cyle Theory”, which proposes cyclical movement in the market during a four-year, presidential term. The cycle can be broadly divided into four phases (based on each year of the term):
- Year One: Often marked by volatility as the new administration implements its policies. Investors may react to uncertainty, leading to muted returns.
- Year Two: This is typically a year of adjustment as policies take effect, and markets often remain cautious.
- Year Three: Historically, the strongest year, as the administration’s policies begin to bear fruit and investor confidence grows.
- Year Four: As the election approaches, markets may experience volatility again due to uncertainty surrounding the outcome.
(Hirsch, 2021)
(Hirsch, 2024)
Key Factors that Influence Market Reactions
- Economic Policy: Investors take cues from candidates’ proposed fiscal and economic policies. Tax reforms, regulations, government spending, and trade policies are all critical drivers of market segments.
- Geopolitical Stances: Foreign policy positions, especially regarding trade, can have a major impact on certain industries. Tariffs, sanctions, and international trade agreements can cause substantial market movements.
- Federal Reserve Policies: Monetary policy decisions during an election year can influence the market’s reaction. Interest rates, inflation control, and quantitative easing policies play a crucial role in how markets react to changing economic conditions during elections.
- Market Sentiment and Speculation: Stock prices often react more to what investors believe will happen than to actual outcomes. Speculation based on polling data, media coverage, and campaign rhetoric can create temporary rallies or pullbacks, even if the underlying economic conditions remain stable.
What to Learn from the Most Recent Elections
Now that we have a look at historical data and important metrics to watch out for, it is important to scale these into the current economic landscape. The two most recent elections, Donald Trump (January 2017-January 2021) and Joe Biden (January 2021-June 2024), illuminate market reactions in the current, fast-paced environment. While we have seen that the S&P 500 can perform well under many political factors, looking at the latest trends can provide key insights on what to look forward to in the coming years under a new presidency.
The following chart compares the market performance of the S&P 500 the day after and the two-month period following an election dating 1952-Present, highlighting the most recent elections of Trump and Biden.
(YCharts, 2024)
The average for all elections since 1952 saw a slight decline the day after election, while the two months following an election showed moderate growth as the market rebounded. The most positive market reactions were seen November 2020 – January 2021 on the day after and two months after Biden’s election. During this period, the S&P 500 soared, likely driven by expectations of stimulus packages and post-pandemic recovery. The worst market reactions were again seen in a single presidency, the Obama administration. The S&P experienced a sharp drop. reflecting the ongoing economic turmoil of the Great Financial Crisis era. Overall, the average election reaction since 1952 has been relatively modest compared to these two specific cases, both Biden’s and Trump’s elections were above average in terms of market performance.
But how did their performance in the S&P 500 translate to their performance in the broader market? The next charts show the cumulative and annualized total returns of various asset classes during the Trump and Biden administrations.
(YCharts, 2024)
Key Highlights:
- Trump Administration: Markest saw strong performance in U.S. Equities (Growth, S&P 500, Small Caps), with significant positive returns in most asset classes.
- Biden Administration: The overall performance of the market was more mixed, with commodities performing well but significant negative returns in Bonds, U.S, Treasuries, and Emerging Markets.
- U.S. Growth (135.8% vs 52.4%): This asset class performed exceptionally well under Trump, with returns more than double that under Biden. This was likely driven by lower interest rates and more business-friendly policies.
- Commodities (-13.4% vs 78.1%): Commodities drastically underperformed during the Trump era, whereas they have a strong turnaround under Biden. This swing can be attributed to supply chain issues, inflation, and the rising prices of raw materials during Biden’ term.
- U.S. Small Caps (68.0% vs -0.7%): Small Cap stocks surged under Trump but have experienced a sharp decline under the Biden Administration. This may reflect weaker small business performance and sectors post-pandemic, or shifting investor sentiment favoring larger, more stable companies.
- U.S. Treasuries (17.8% vs -10.9%): U.S. Treasuries experience positive returns under Trump but have seen negative returns under Biden, again likely a reflection of rising interest rates.
Navigating the Market During Election Years
While presidential elections create a heightened degree of uncertainty, history shows that the stock market tends to perform positively over the long term. Investors should avoid making rash decisions based on short-term election year volatility and instead focus on long-term investment strategies. The key is to stay informed about how potential policy changes might affect specific sectors and industries.
Elections can provide both risks and opportunities for investors. By understanding the broader historical patterns, key drivers behind market movements during election cycles, and recent presidential administration influences on the market, investors can better navigate the fluctuations and position themselves for long-term success.
Maverick Wealth Advisors provides all investment advisory services through Concurrent Investment Advisors, LLC, an SEC Registered Investment Advisor. Concurrent Investment Advisors d/b/a Maverick Wealth Advisors are not affiliated companies.
Sources:
YCharts. (2024). How Do Presidential Elections Impact the Market?
Hirsch, J. A. (2021). Stock Trader’s Almanac 2022. John Wiley & Sons.
Hirsch, J. (2024, August 19). Seasonality Works! Trade the Cycles & Profit from History. Almanac Trader. https://jeffhirsch.tumblr.com/post/759272451637231616/seasonality-works-trade-the-cycles-profit-from