As we stand just shy of a month from Election Day, the political atmosphere is heating up. Campaign ads are flooding our screens, and candidates are under the constant scrutiny of the media. With the 2024 presidential election looming, it’s time to take a step back and examine how past campaigns have influenced financial markets. Can we spot any trends that might guide our investment decisions for the next four years?
Debunking the Republican Myth
There’s a popular belief that Republican presidents are better for financial markets. While this idea might hold water in the lead-up to a Republican taking office, it doesn’t quite pan out during their actual term. The truth is, markets – especially equities – tend to perform well regardless of which party occupies the Oval Office.
In fact, since the Great Depression, only two presidential terms have seen negative equity returns throughout their duration. Both were Republican: Richard Nixon (January 1969 – August 1974) and George W. Bush (January 2001 – December 2008). On the flip side, only two presidential terms have witnessed negative returns for 10-year Treasuries throughout their entire duration. Both were Democratic: Jimmy Carter (January 1977 – December 1980) and the current president, Joe Biden (January 2021 – present).
Democrats and the Stock Market: A Surprising Relationship
Contrary to popular belief, equities have actually experienced their best performance under Democratic presidents. The S&P 500 index posted an impressive +15.2% return during Bill Clinton’s two terms and a solid +13.8% during Barack Obama’s tenure. The best-performing Republican president for stocks was Donald Trump, with a +13.7% return.
Since the Great Depression, we’ve had 15 presidents. Of these, eight presided over double-digit returns in the S&P 500 index. It’s worth noting that the market has posted returns of over 20% during the last four inauguration years (2021, 2017, 2013, and 2009). In fact, since 1977, four out of twelve inauguration years saw the S&P 500 index surge by over 30% (2013, 1997, 1989, 1985).
The Republican Edge: Bonds and Fixed Income
While stocks seem to favor Democrats, bonds typically perform better under Republican administrations. The top four periods of total return performance for 10-year government bonds all occurred under Republican presidents. Moreover, all primary fixed income sectors showed better total return performance under Trump compared to Biden.
Sector Performance: A Mixed Bag
Trying to prove that one party is definitively better for markets becomes even more challenging when we look at equity sectors. During Trump’s term, the best-performing S&P 500 sectors were information technology (+31.54%) and consumer discretionary (+20.59%). Surprisingly, the energy sector was the worst performer (-11.94%).
The story flips during Biden’s term (through September 2024). Energy (+30.84%) and information technology (+20.09%) sectors outperformed, while the consumer discretionary sector lagged behind (+6.60%).
Election Impact on Market Volatility
While equity performance is typically strong during the first year of a presidential term, both equity (VIX) and bond (MOVE) volatility tend to spike immediately after Election Day, regardless of which party wins. However, markets generally experience more volatility following a Republican victory.
The Bigger Picture
Despite the popular belief that Republican presidents are better for financial markets, the reality is more nuanced. While the sitting president’s party may influence which equity sectors perform better than others, the broader equity market tends to perform well regardless of who’s in office. History shows that bond performance, however, tends to be stronger under Republican administrations.
What Really Drives Market Performance?
Discussions about which party is better for financial markets will likely continue indefinitely. However, history suggests that these debates may be somewhat irrelevant. The performance of financial markets, particularly equities, doesn’t hinge solely on who occupies the Oval Office. Instead, it’s more closely tied to the overall health of the economy and corporate earnings.
Investment Strategy: Focus on the Long Term
Rather than fixating on who will be president for the next four years, investors would do well to focus on the long term when building their portfolios. While political events can certainly create short-term market fluctuations, they rarely dictate long-term market trends.
Key Takeaways for Investors
1. Party Performance: Both parties have presided over periods of strong market performance. Don’t base your investment decisions solely on which party wins the election.
2. Inauguration Year Opportunities: Historically, inauguration years have been good for stocks, regardless of the winning party. Keep an eye out for potential opportunities in these periods.
3. Sector Rotation: Different sectors may perform better under different administrations. Consider diversifying your portfolio to hedge against potential sector-specific risks.
4. Volatility Awareness: Be prepared for increased market volatility around election time, especially if there’s a change in the ruling party.
5. Bond Performance: If you’re heavily invested in bonds, be aware that they have historically performed better under Republican administrations.
6. Economic Indicators: Pay attention to broader economic indicators and corporate earnings reports, as these factors have a more significant impact on market performance than election results alone.
7. Long-Term Perspective: Remember that presidential terms are relatively short in the grand scheme of long-term investing. Don’t let short-term political events derail your long-term financial strategy.
As we approach the 2024 election, it’s natural to wonder about its potential impact on our investments. While it’s important to stay informed about political developments, it’s equally crucial to maintain a balanced, long-term perspective on your investment strategy.
The data shows that markets can thrive under both Democratic and Republican administrations, albeit with some variations in sector performance and bond market behavior. Instead of trying to time the market based on election outcomes, focus on building a diversified portfolio that aligns with your long-term financial goals.
Remember, the stock market is not the economy, and the economy is not the stock market. Political events can create noise and short-term volatility, but over time, it’s the fundamental strength of businesses and the overall economy that drive sustainable market growth.
As you navigate the uncertain waters of election season, keep your financial goals in sight and resist the urge to make dramatic changes to your investment strategy based solely on political outcomes. After all, the most successful investors are often those who can tune out the noise and stay focused on their long-term objectives.
Acknowledgment: This article was inspired by and includes information from "The Impact Presidential Elections Have on Markets" published on Wealthmanagement.com. For more detailed insights, you can read the full article here.
