In a normal election year, a lot goes on, but this one seems different, as it should. Of course, if you don’t have a crystal ball, you shouldn’t try to guess the future when it comes to investment. It can be very bad to give in to political fears or hopes by making big changes to your investments.
Even though it may not be worth it to try to guess how the market will react to a specific event, like a Trump re-election or a Biden win, historical trends about how the stock market has done before, during, and after presidential elections can help investors who are unsure of what to expect. History can teach us a lot, but as we all know, we can’t be sure of what will happen in the future.
In the months before an election, the stock market has been more volatile than usual. This makes sense since the markets don’t like unpredictability. For investors, it’s important to take a step back, put aside how you feel about politics, and look at the situation rationally to see what it might mean for your own money.
The 2016 election is a good example of how wrong estimates can be and how quickly the market can adjust to new information and get back on its feet.
On the night of the 2016 election, when more states started reporting and it became more possible that Trump would win, stock market futures dropped quickly. In pre-market trade, the S&P 500 fell more than 5%, which caused a circuit breaker to stop dealing. The day after the election, when the market ended, the index was up more than 1%.
It’s worth noting that a quick Google search for “2016 Trump win and stock market” brings up a lot of results that say the economy will go into a recession right away, markets will tank, and stocks will go down (all of which were written before November 8, 2016). Between 2017 and 2019, the index’s price went up by more than 14% on average each year.
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History shows that the economy and the stock market are two of the most important factors in deciding who wins a presidential race.
Even though the stock market is not the same thing as the economy, in the past, both have had a big impact on who wins the presidency.
Every president who stopped a decline in the last 100 years was re-elected. Only one president, Calvin Coolidge, was re-elected after a decline in the two years before the election.
This study also shows that how the stock market does in the weeks before an election is a good way to predict who wins. Since 1928, 87% of elections have been forecast by the success of the S&P 500 in the three months before the election, and 100% of elections since 1984. When the results are good, the party in power wins. If the measure fell during the three-month time period, the holder loses.
It shouldn’t be a surprise that the markets do better when the same president is re-elected than when a new president is chosen. As was already said, the markets hate not knowing what will happen. A new president can bring about more unknowns, such as the possibility of more rules, higher taxes, and other changes that the market sees as bad for business.
Stock and bond returns during election years in the past
As of the end of trading on August 17, 2020, the S&P 500 had gained 4.68% for the year so far, and the Bloomberg Barclays US Aggregate Bond Index had gained 6.94%.
Comes back the following year.
In the past, stocks and bonds in the U.S. have done better in the year before an election than in the year after. On the other hand, profits on foreign stocks have been much higher in the year after a U.S. presidential election than they were during an election year.
Different parties lead different kinds of stocks around the world.
Dimensional Fund Advisors says that since 1973, the average yearly returns for developed foreign stocks over the course of a Democratic president’s term have always been positive. But since 1989, developing market stocks were only up 50% of the time when Democrats were in charge, while they were up 100% of the time when Republicans were in charge.
Like the U.S. stock market, the profits of foreign stocks rely on many things, many of which are out of the government’s control. Natural disasters, terrorism, political scandals or unrest in a country, global issues, trade policy, international relations, and the relative power of the dollar are just some of the things that can affect the value of a currency.
Returns when the House and Senate are controlled by Democrats, Republicans, or a mix of both
Returns in the financial markets are caused by many different things. One of them is the party that wins a presidential race. Here are some interesting facts from Strategas Research Partners about which party controls the White House and Congress:
- Since 1933, the mix of a Democratic Senate, a Republican House, and a Democratic President has been the most profitable for the S&P 500, with average returns of 13.6% per year. In 2020, all three of these things would have to change.
- The usual return we get from our present mix of a Republican Senate, a Democratic House, and a Republican President is 10.8%. If President Trump is re-elected, this is likely to happen.
- If Biden wins, it’s likely that the Senate will be Republican, the House will be Democratic, and, of course, the White House will be run by a Democrat. It’s interesting that this hasn’t happened since Grover Cleveland ran for president in 1886.
- Managing your money during an election year
If you don’t have a financial adviser, it can be hard to keep track of your money, especially during an outbreak, crisis, or presidential election.
Here are a few key points to help you stay on track with your money:
The point of the titles is to get your attention; that’s what they’re for. For the news media, presidential elections are like the Super Bowl, which only happens once every four years. Advertising money is coming in, and everyone is racing to make material and get people to look at it. Don’t believe everything you read.
Pay attention to what you can change. It won’t help anything to worry about what could happen in all the different ways the election could go. Instead, you should think about putting your energy into things you can control, like how balanced your portfolio is against market instability.
Move back a bit. Take a look at the first chart in this piece. Under all leaders, the stock market has gone up and down. But over time, things have been getting better. If you worry too much about what might happen over the next four years, you might miss the big picture.