It isn’t even 2020 yet, and it seems like we are already in full swing for election season. On both sides of the aisle, there are doom and gloom proclamations if the other party wins the Presidential election. Republicans say the stock market will go into a downward spiral if someone like Elizabeth Warren or Bernie Sanders were to win the election. Democrats say the stock market is already on the brink and will tank if Donald Trump is re-elected. And the media, especially the financial media, LOVES this. The financial media plays into these fears because they know investor uncertainty drives people to view their programs – which only act as fuel for the fire and are far from being a calming source. But as disruptive as elections seem to be, do they have an impact on the stock market?

Trigger Warning

Before we go any further, I want to assure you that no matter which party you align yourself with, there is something in this post that will likely make you upset. Likewise, I know there are many aspects in this post each side will find appealing. The point of this article is not to say you should hope for one result over the other. The only thing I care about is to look at the data as objectively as possible. When it comes to investing, emotions cloud judgments and it is natural to let emotions come into play when politics are involved. After all, the entire point of politics is to tap into voter’s emotions. The savvy investor can look past their internal biases to see the big picture. With that said, let’s dive in!

For all data, I am going back to 1926. I’m using returns from the S&P 500 and I am including dividends as part of the annual return. For 2019, I’m using market data through November 8th. As always, past performance is not a guarantee of future returns.

Stock Market Performance: Democrat v. Republican

First, I wanted to look at stock market performance when each party is heading up the Presidency. With 94 years to look at, a Democrat was in charge 48 times and Republican was in charge 46 times. On average, the stock market performed 6% per year better when a Democrat was President than when a Republican was President. Quite frankly, I had to double-check my work to make sure this was correct - and it was. This difference is quite significant.  For example, 8 years of a Democrat at 14.9% average annual return turns $100,000 into $303,780 and 8 years of a Republican at 8.9% average annual return turns $100,000 into $197,798. In only 8 years, it’s a difference of $105,982.

When a Democrat was in power, markets were positive 4 out of 5 years. When a Republican was in power, markets were positive 2 out of 3 years. This data contradicts the narrative each political party likes to portray for itself.

Stock Market Performance: Election Years v. Non-Election Years

Next, I wanted to compare stock market performance during election years to non-election years. There were 71 non-election years and 23 election years. On average, non-election years had an average return of 12.2% to the election year return of 11.3%. Yet, non-elections years were positive only 70.4% of the time compared to election years being positive 82.6% of the time. The data in this set suggests election years are less volatile than non-election years.

Stock Market Performance: Republican Election, Re-Election, Republican Re-Election

Finally, I wanted to drill further down into 3 different election year scenarios. The first scenario is only election years when the incumbent party is Republican.  The second scenario is only years when the incumbent party, regardless of party affiliation, is seeking re-election. And the third scenario is when the incumbent party is a Republican and is seeking re-election. The first scenario has 11 years that qualify and the average return was 8.2%. The stock market was up 81.8% of the time. The second scenario has 15 years that qualify with an average return of 13.5%. In this second scenario, the stock market was up 86.7% of the time. The third scenario had 7 years with an average return of 9.4%. The stock market when a Republican is seeking re-election was up 85.7% of the time.

Summary

It would appear, given the data, that stock markets are indeed less volatile in election years – especially when a Republican is seeking re-election. This is by no means a guarantee the stock market will be up next year, merely a demonstration that the data suggests 2020 may not be as volatile as the financial media makes it seem. To be clear, certain aspects of the economy could turn things negative – mainly being the ongoing trade war, the effects of the 2019 yield curve inversion spreading throughout the economy, and Trump’s personality, in general, spooking markets depending on what he tweets that day. Wealthy investors are already buying into the narrative the financial media is portraying that 2020 is going to have a “significant drop in the markets”.

Final Thoughts

My prediction for 2020 is Trump will do everything in his power to ensure the stock market keeps going in a positive direction as he has implied many times the success of his Presidency is tied to what the stock market does. With the Federal Reserve's accommodating policies to combat the yield curve inversion, coupled with trade tensions with China seemingly easing towards a deal, I think markets may be choppy as worst-case, but will eventually end the year with high single-digit returns. Far from doom and gloom. That being said, if Trump is actually removed from office in 2020 due to impeachment hearings – all bets are off on what the market will do. But I do know this, decades from now the stock market is going to be higher than it is today and I invest with that long term perspective in mind. Keep this post in your memory when you are being bombarded with non-stop election prognostications in 2020 – the civil volatility that elections generate doesn’t mean the stock market will be volatile.

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About The Author

Shaun Melby, CFP® provides fee-only financial planning and investment management services in Nashville, TN. Melby Wealth Management serves clients as a fiduciary and never earns a commission of any kind. Shaun has over 10 years of experience as a financial advisor in Nashville.