Introduction
Every four years, the lead-up to a U.S. presidential election can stir up concern among investors. From Wall Street pros to university employees managing their 403(b) accounts, many are left wondering: “How will this impact my portfolio?” But here’s the thing—while it’s easy to get caught up in political headlines, at Provizr, we’re here to help you focus on what truly matters: staying on track for the long term. Let’s break down the facts and take the guesswork out of election-year investing.
Historical Context: What History Tells Us
Let’s take a step back and look at the stock market over the past century, especially during election years. Since 1928, the S&P 500 has had positive returns in 17 of the 23 presidential election years, averaging around 11%—slightly better than the general annual average of 10%. But, that doesn’t mean every election year has been a smooth ride.
Here’s a snapshot of the data from 1970 to 2020:
As this chart illustrates, the market doesn’t always follow a clear pattern. While most election years have seen positive returns, there have been exceptions—most notably, the financial crisis in 2008. So, while elections may create buzz, they’re just one piece of the puzzle.
General Portfolio Performance: Surprising Findings
Here’s an interesting tidbit: portfolios have historically done slightly better in election years than in non-election years. A study by Deutsche Bank showed that from 1900 to 2020, the U.S. stock market averaged a return of 11.3% during election years, compared to 9.9% in non-election years.
Now, before you start celebrating, it’s important to note that this difference is not statistically significant. In other words, don’t base your investment strategy solely on election cycles.
When it comes to elections, several key factors can influence market behavior:
1. Potential Policy Changes: Markets can get jumpy as investors try to guess what policies will come from the next president.
2. Government Spending: Sometimes, governments may roll out economic stimulus during election years to boost their standing with voters.
3. Post-Election Clarity: Often, just knowing the outcome—no matter who wins—can calm the markets as the uncertainty fades.
Market Volatility: The Election-Year Jitters
If there’s one thing elections do reliably, it’s stir up volatility. In the months leading up to election day, you can expect markets to be jumpier than usual. The Chicago Board Options Exchange Volatility Index (VIX), often called the "fear index," tends to spike as election day nears.
Why does this happen?
1. Uncertainty: Markets don’t like uncertainty, and competing visions from candidates can cause jitters.
2. Polling Shifts: As polls shift, markets may react to the perceived likelihood of various outcomes.
3. Last-Minute Surprises: Unexpected events or scandals in the final stretch can send markets on a rollercoaster ride.
The good news? This volatility usually calms down soon after the election—no matter who wins.
For example, you might see a "relief rally" as markets breathe a sigh of relief when the election’s over and the uncertainty fades. History shows that markets often perform well when power is divided between the White House and Congress, likely because it reduces the chances of extreme policy changes.
Wrapping Up Part 1
As we conclude Part 1, it’s clear that while elections can have an impact on your investments, they’re just one of many factors. What really matters is your long-term strategy. Don’t let short-term political headlines drive your financial decisions. Instead, trust in your diversified portfolio and focus on your long-term goals.
Stay tuned for Part 2, where we’ll look at how different asset classes behave during election years and provide practical advice on navigating politically charged markets.
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