When it comes to Presidential Elections and the stock market, history shows that the outcome has little impact on long-term performance.

As the 2024 U.S. Presidential Election approaches, many investors are worried about its potential impact on the stock market. The situation has become even more uncertain since President Biden’s withdrawal from the race. While Vice President Harris is considered a likely successor, an official Democratic nominee has yet to be announced.

Despite the current ambiguity, historical data offers a reassuring perspective: presidential elections typically don’t have long-lasting effects on financial markets. In fact, stocks have shown a tendency to rise over time, regardless of which party occupies the White House.

To help ease concerns about this year’s election outcome, let’s explore some key insights from past market performance during election cycles.

How the Stock Market Performs in Presidential Election Years

Historically, the U.S. stock market has exhibited distinct patterns during presidential election years. For instance, in the months leading up to an election, market volatility tends to increase as investors grapple with the uncertainty surrounding the outcome and its potential economic implications.

However, a closer look at market trends in the months following past elections reveals a more nuanced picture. Specifically, in the immediate aftermath of an election, the stock market often experiences a brief period of increased volatility as investors adjust to the new political reality.

This volatility can be particularly pronounced if the election results are unexpected or if there’s a prolonged period of uncertainty. One notable example is the contested 2000 election between George W. Bush and Al Gore when the S&P 500 fell -7.8% from Election Day through year-end.

Meanwhile, quarterly stock market performance during presidential election years tends to vary. While the first half of election years is often sluggish, stronger performance in the second half of the year frequently follows.  

For instance, since 1926, the average returns for the S&P 500 in the first and second quarters of election years have been relatively modest at +1.3% and +1.5%, respectively. However, market growth has historically accelerated in the third and fourth quarters, with average returns of +6.2% and +3.3%, respectively.

Despite these short-term fluctuations, the stock market has generally displayed resilience during election years. In fact, research from LPL Financial shows that since 1952, the S&P 500 has generated an average return of +7% during presidential election years, suggesting that the market tends to adapt relatively quickly to new administrations and their policies.

Understanding the Longer-Term Impact of Presidential Elections on the Stock Market

Depending on the analysis period, historical returns may suggest that the stock market performs better under one party compared to the other. For instance, from 1952 through June 2020, the average annual real return for the S&P 500 was +10.6% under Democratic presidents and +4.8% under Republican presidents, according to a recent Forbes analysis.

Yet, stock market performance doesn’t always move in lockstep with the economy (or election cycles for that matter). For example, Bill Clinton was president during one of the most noteworthy economic expansions and bull markets in history; however, George W. Bush was actually in the White House when the expansion began.

Despite the performance patterns that tend to emerge leading up to and following election years, U.S. stocks have historically posted gains over the long run regardless of which party is in the White House. In fact, over the last 50 years (as of April 30, 2024), the S&P 500 has delivered an average annual return of +11.35%.

Exploring America’s Most Contentious Presidential Elections

The U.S. presidential election between Joe Biden and Donald Trump in 2020 was remarkably contentious, but it wasn’t the first time the nation faced such a divisive electoral battle. Throughout American history, several presidential elections have left a significant mark due to their intense disputes and enduring impacts.

These elections illustrate the enduring challenges of the U.S. electoral system and the nation’s capacity to navigate political crises. While the specifics of each case differ, the underlying theme remains the same: the resilience of American democracy and the U.S. economy in the face of profound political divisions.

The Election of 1800: Jefferson vs. Adams

The election of 1800 between Thomas Jefferson and John Adams is often cited as the first major contentious presidential race. The Federalist incumbent Adams faced off against his Democratic-Republican challenger Jefferson in an election that highlighted deep political divisions.

The electoral tie between Jefferson and Aaron Burr, both from the same party, led to a prolonged decision process in the House of Representatives. Ultimately, Jefferson’s victory set a precedent for the peaceful transfer of power, a cornerstone of American democracy.

During this early period, detailed stock market data is sparse, but the election didn’t significantly disrupt the fledgling U.S. economy.

The Election of 1876: Hayes vs. Tilden

Perhaps the most contentious election in U.S. history occurred in 1876 between Rutherford B. Hayes and Samuel J. Tilden. Tilden won the popular vote, but 20 electoral votes from four states were disputed amid accusations of fraud and corruption.

The Compromise of 1877 resolved the stalemate, which awarded the presidency to Hayes in exchange for the withdrawal of federal troops from the South, effectively ending Reconstruction. This compromise had long-lasting repercussions, particularly for African American civil rights​.

Stock market data is also sparse from this period, but the aftermath of the Civil War and the Panic of 1873 heavily influenced economic conditions, and not in a good way.

The Election of 1912: Wilson vs. Roosevelt vs. Taft

The 1912 election was another highly contentious race involving former President Theodore Roosevelt, incumbent William Howard Taft, and Democrat Woodrow Wilson. After failing to secure the Republican nomination, Roosevelt ran as a third-party candidate under the Progressive Party, splitting the Republican vote and enabling Wilson to win.

This election was marked by Roosevelt’s dramatic campaign, including surviving an assassination attempt and continuing his speech despite being shot. The division within the Republican Party highlighted the era’s intense political strife and paved the way for Wilson’s progressive reforms. 

Better stock market data exists for this period. The Dow Jones Industrial Average showed a modest performance throughout the year, reflecting investors’ adjustment to the political uncertainty and the split in the Republican Party.

The Election of 2000: Bush vs. Gore

The 2000 election between George W. Bush and Al Gore is famous for its protracted and bitter dispute over Florida’s electoral votes. The close vote count led to multiple recounts and legal battles, culminating in the Supreme Court’s decision in Bush v. Gore, which effectively awarded Florida’s electoral votes to Bush, securing his presidency.

The controversy over ballot design, voter intent, and the integrity of the electoral process raised serious questions about the robustness of American democracy​. The S&P 500 experienced significant volatility as a result and ended the year with a loss of -9.1%.

The Election of 2020: Biden vs. Trump

The 2020 election between Joe Biden and Donald Trump was particularly contentious, marked by claims of fraud and a prolonged vote count. Despite the political turmoil, the S&P 500 ended the year with a strong performance, gaining +18.4%. This was largely due to the market’s optimism about post-election stability and the expected economic recovery from the COVID-19 pandemic.

Time in the Market Matters More Than Political Party

While presidential elections can trigger short-term market swings, the long-term performance of the U.S. stock market has historically been more influenced by time invested rather than by which party controls the White House. Consider this striking example: from 1926 to 2023, a $1,000 investment in the stock market, with dividends reinvested, would have grown to over $14.5 million—regardless of which political party held the presidency.

This remarkable growth highlights two crucial points for investors:

1. The power of maintaining a long-term investment strategy, rather than attempting to time the market based on election outcomes.
2. The significant impact of compounding returns over extended periods.

These insights underscore why staying invested for the long haul is often more beneficial than making reactive decisions based on short-term political events.

Presidential Elections and the Stock Market: Additional Considerations for Long-Term Investors

While understanding the historical relationship between presidential elections and the stock market can be helpful, it’s important to recognize the limitations and caveats of these analyses.

First, elections are inherently unpredictable. Despite the increasing sophistication of polling methods and political forecasting, there’s always the potential for unexpected outcomes or events that can significantly impact the market. The 2016 U.S. presidential election, for example, defied many pollsters’ predictions and led to a brief period of market volatility before stocks ultimately rebounded.

Additionally, it’s crucial to remember that presidential elections are just one of many factors that can influence the stock market. Economic indicators such as GDP growth, inflation, and employment rates, as well as corporate earnings, interest rates, and global events, all play significant roles in shaping market sentiment and performance. In many cases, these factors outweigh the impact of an election.

As an investor, it’s crucial to maintain a long-term perspective and stay focused on your financial goals. By staying informed and sticking to your investment plan, you can successfully navigate short-term market fluctuations and position yourself for long-term financial success.

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