Presidential Elections & Stock Market Returns: The Evidence is Overwhelming
As the US presidential election approaches many investors are trying to determine how the result will affect their investments and what changes they should make. People are anxious and looking for solid guidance on what they should do. Fortunately, the data is clear, and the choice is obvious.
2020 has given us a seemingly never-ending stream of unexpected events. So much uncertainty has sent the stock market careening up and down, from bear market lows to record highs. It is enough to shake the confidence of even the most disciplined investors. People are mentally and emotionally exhausted and looking anywhere for a reprieve. This, unfortunately, is the backdrop as we head into another major event in 2020, the US Presidential Election.
Presidential elections elicit strong feelings and emotions even in good years. In 2020, it feels as if the presidential election could be the straw that breaks the camel’s back. Many Americans on both sides of the aisle think their candidate is the only hope to save our country from impending doom, while the other candidate will surely hasten it. Because the feelings are so strong, it seems like we must make a dramatic and decisive move with our investments to prepare for this impending event. But ultimately investment decisions have to be made on empirical data, research, and a long-term investment horizon. How we “feel” the market should behave does not really matter at all unless it is backed up by evidence. The question to be asked is: Do we have any reliable evidence indicating how presidential elections affect investment returns and, if so, can we use that information to make better investment decisions?
Thankfully, we do have extremely strong evidence concerning the effect of presidential elections on stock market returns and we do think you should act accordingly. The overwhelming, undeniable fact is that presidential elections have no effect on the long-term performance of the stock market. There is not a shred of evidence to support making an investment decision based on your prediction of who will win the 2020 election. We can look back as far as we have data, and one thing is clear: The market goes up, on average, regardless of who controls the White House. This truth extends to elections concerning the house of representatives and senate as well. The two graphs below illustrate well the agnostic nature of the market in regard to political parties in the US. The first chart shows stock market performance by president and the second chart shows stock market performance by control of Congress The only information these charts tell us is that the market goes up over time, regardless of who is in power.
Does this information surprise you? Politicians tell us every day that if the other side wins, we will face immeasurable disaster in the economy and stock market. But it is simply not true. It might not seem evident at first why this is the case, but with a closer look we can understand why.
Ultimately, the economy and businesses that drive investment returns are driven by a complex set of factors, and politics is but one small variable amongst thousands of variables that affect outcomes. The best anecdotal evidence of this is communist China which has had one of the best performing stock markets of the past 20 years. That fact in no way implies communism is good for investing, it merely shows that form of government or who is in charge is not correlated to market returns.
With the knowledge that US Elections have no bearing on stock market returns, it should be clear that making any investment decisions on what may or may not happen would be extremely unwise. You might as well make investment decisions based on who will win the NBA playoffs this year because they are both equally predictable of stock market performance.
Of course, we are not saying stand there and do nothing. Your investment strategy should be based on your personal financial situation and long-term goals. A tumultuous year, like this one, can be a perfect time to check your plan and make sure you are still invested in a way that exactly matches your risk tolerance and purpose. But any changes to your investments should be based on factors that are within your control and never something outside your control, like the US Election.
Lastly, if you would like to watch a video explanation of the data presented here please check out this video posted by our friend at Dimensional Fund Advisors: https://www.dimensional.com/us-en/insights/highlights-what-history-tells-us-about-elections-and-the-market