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How Do Elections Affect the Stock Market?

By Dave

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How do Elections Affect the Stock Market

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US elections have a huge impact on the direction of the country for years to come. They impact everything from the economy and fiscal policy to trade relations and domestic spending.

But do elections affect the stock market? And if so, are they good or bad for the market?

In this guide, we’ll look at the data around presidential and midterm elections to answer these questions and help investors and traders navigate the next election.

Do Elections Affect the Stock Market?

We’ll look at both presidential and midterm elections to evaluate their impacts on the stock market.

Presidential Elections

A US Bank analysis comparing stock market returns and elections going back to 1932 found that in the year leading up to a presidential election, the stock market tends to underperform.

In any given 12-month period not before a presidential election, the market gained an average of 8.5%. But in the 12 months directly preceding an election, the market gained an average of only 6%.

The analysis found that bonds also suffered in the run-up to an election. Bonds gained 7.5% in any non-election 12-month period, but only 5% in the 12 months before an election.

Midterm Elections

US Bank also analyzed stock performance around midterm elections going back to 1962. This analysis found that in the 12 months before a midterm election, the S&P 500 gained an average of just 0.3% compared to a 60-year average annual gain of 8.1%. In the 12 months immediately following a midterm election, the market gained an average of 16.3%.

This suggests that the market tends to severely underperform in midterm years and outperform in the following year.

However, a longer-term Vanguard analysis looking at returns as far back as 1860 found that there’s almost no difference in stock and bond performance between election (including both midterm and presidential elections) and non-election years. Vanguard’s analysis found that a model 60% stock and 40% bond portfolio would have returned 8.1% on average in election years and 8.2% on average in non-election years.

Political Parties and Stock Market Performance

Interestingly, both the US Bank and Vanguard analyses found that the outcomes of elections—that is, which political party won—have almost no impact on stock market performance.

For presidential elections, if the White House changes parties, stock market gains averaged 5% over the following 12 months. If the incumbent party was re-elected, gains averaged 6.5% over the following 12 months. There was no difference based on whether Democrats or Republicans held the presidency.

For midterm elections, there was no statistically significant difference in stock market returns in the 12 months following an election regardless of whether control of Congress changed hands or the incumbent party remained in power. There was also no difference based on whether Republicans or Democrats held control of Congress.

Presidential Elections and Volatility

An analysis by Hamilton Place Strategies found that implied volatility, measured by the VIX Index, consistently increased in the lead-up to elections going back to 1992. However, the same analysis found that there was no trend in realized volatility in the S&P 500 following the election outcome.

Furthermore, Vanguard’s analysis found that annualized volatility in the S&P 500 was the same, at 13.8%, in the 100 days before and 100 days after presidential elections.

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This suggests that elections don’t offer outstanding opportunities for trading. However, the Hamilton Place Strategies analysis did find that candidates’ policies can result in significant volatility spikes in individual stocks. In 2016, for example, when Donald Trump won the presidency in a surprise victory, oil and gas stocks saw a massive surge in volatility.

Long-term Investing Around Elections

For long-term investors, these results suggest that the 12 months before elections—both presidential and midterm elections—tend to see worse stock market performance compared to the 12 months following an election. 

However, it’s important to note that in most election years, the S&P 500 still produced a positive performance. This means that investors would ultimately miss out on gains by waiting for a non-election year to invest.

So, long-term investors shouldn’t pay too much attention to election cycles. They may want to slightly weight their investments towards non-election years, but it’s not advisable to hold off on investing entirely during election years. 

Investors should also keep in mind that elections can have a psychological impact that they need to account for. If an investor’s favored party loses on election night, it can encourage them to pull out of the market. This can ultimately harm investors’ performance because they can miss out on the first days after an election, when volatility drops and a potentially outperforming non-election year is beginning.

Short-term Trading Around Elections

Short-term traders can attempt to trade around elections, but the data suggests that elections generally don’t result in increased volatility across the stock market. The best approach for traders may be to focus on stocks in industries whose fortunes depend on the election outcome.

For example, in a prospective 2024 Biden-Trump rematch, renewable energy stocks and oil and gas stocks could experience high volatility in the event of a Trump victory. However, there’s also a chance that the election outcome could be priced in for these stocks if the outcome is predicted correctly ahead of election night.

Conclusion: Elections and the Stock Market

Historical data shows that the stock market tends to underperform in the 12 months leading up to presidential and midterm elections. However, the market has historically outperformed its long-term average in the year after a midterm election. Stocks typically aren’t affected much by which party wins or whether the control of the White House or Congress changes.

Investors may consider investing more in the market in non-election years, but they will on average earn the highest returns by investing consistently and staying invested no matter the outcome of an election. Traders are unlikely to find unusually high volatility around presidential elections, although they may be able to act on volatility in specific stocks that are impacted by a candidate’s proposed policies.

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Dave has been a part-time day trader and swing trader since 2011 when he first became obsessed with the markets. He focuses primarily on technical setups and will hold positions anywhere from a few minutes to a few days. Over his trading career, Dave has tried numerous day trading products, brokers, services, and courses. He continues to test and review new day trading services to this day.

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