Elections and the Market

In the face of the coming presidential election, many investors wonder how the outcome of the race for the White House will impact market returns. While it is easy to get caught up in the excitement and noise of the moment, history shows that the winner of a presidential election is not a reliable predictor of what will happen in the stock market. Election campaigns and biased news media will argue that “this time is different;” however, we believe that the sun will keep coming up and the economy will drive forward regardless of who is president.

As an illustration of this point, the graph below shows the average annualized return during each presidential term since 1929:

After nearly a century of data, it is impossible to find a clear and reliable pattern between presidents or parties and stock market returns. Why? For one, because so many other factors impact stock prices. While the President may have some influence over the markets, so do countless other things, such as the actions taken by individuals, companies, or foreign governments, global pandemics, economic fluctuations, etc. All in all, there are hundreds (if not billions) of inputs affecting market returns, and investors tend to overestimate the real impact of presidential elections. Additionally, presidents and their supporters like to take way too much credit for market returns during their tenure (as long as returns are good!), further emphasizing the fallacy that they are primarily responsible.

Part of being a long-term investor is a willingness to bear risk, or in other words, uncertainty. Market prices may go up, down, or stay relatively stable this fall, regardless of whether your preferred candidate wins or loses the election. The uncertainty associated with unknown future events is necessary to capture long-term returns. And history shows that markets have rewarded long-term investors, regardless of who is in the White House:

For more information, we recommend watching this short video featuring Jake DeKinder and Mark Gochnour from Dimensional Fund Advisors. They provide an insightful discussion on this question here: https://www.dimensional.com/us-en/insights/highlights-what-history-tells-us-about-elections-and-the-market