When the Fed convened last month and previewed its rate policy for the remainder of 2024, no one anxiously called to inquire about changing their investment allocation. The same can be said when Apple and Nvidia reported quarterly earnings earlier this year. Or when March CPI and 4th quarter GDP data were released. And yet, when the presidential election result becomes clear – likely sometime on the morning of November 6 and regardless of who the winner is – I anticipate getting an anxious email and/or phone call with concern about the impact to investment markets and to inquire about whether we should make any portfolio adjustments. This is not meant to suggest such natural anxiety or emotional reaction to an election result is unhealthy. Our minds behave how they behave and that is just a natural response.
Despite this anticipatory anxiety, it is fundamental to understand that elections have a far, far, far less significant impact on investment markets than most tend to believe. This common overreaction can largely be attributed to the intense media coverage and discussion elections receive, which amplifies our emotional responses and can distort our perception of their actual importance to financial markets. Elections bring drama and competition – both of which attract viewers, readers, and listeners. Media coverage of any topic is always driven by economic incentives. High interest in presidential elections and a national audience translates to increased viewership and readership which boosts advertising revenue for media outlets. That said, it benefits financial news media to connect presidential elections to financial markets – even if robust data demonstrates that the actual connection is very limited.
The fact is this: historical data and numerous empirical studies demonstrate that the long-term influence of elections on market direction and economic fundamentals is minimal. The forces that truly drive market performance—such as economic growth rates, interest rates set by central banks (like the Federal Reserve), corporate earnings, and global economic policies—tend to have a much stronger and enduring impact. Therefore, the heightened emotional response to election results is more a reflection of our susceptibility to media narratives and less about the substantive influence of these events on the investment landscape.
That said, I want to also address a few of the other fictional narratives around elections that will be useful to keep in mind as November approaches.
Fiction: Election years are more volatile than average.
Investors tend to equate election years with elevated uncertainty. As a result, some might wait until after an election to invest under the illusion that the election will bring greater clarity or stability.
There is no historic evidence that election years are more volatile than normal. In fact, presidential election years since 1890 have experienced less stock market volatility than non-election years as evidenced below.
Fiction: Once the election result is known, we should reduce/increase risk if Trump/Biden is elected.
Once the election results are publicly known, stock and bond prices should immediately reflect the result, positive or negative. In order to justify trading based on the result, we would need to have a better understanding of what the result means for global economics than the rest of the world or we would simply need to know the election outcome before the rest of the world.
Quoting from the Wall Street Journal, “Extrapolating common knowledge into predictions of the future is really just following the herd, and that typically doesn’t go well.” I cannot emphasize this enough: The market does not move based on what happens but on what happens that was not already expected to happen.
Fiction: Given the uncertainty surrounding the election, it’s a good idea to hold cash and wait until after the election to invest.
Since investment markets move higher over time, this line of thinking inherently presupposes that markets will perform poorly leading up to a presidential election and that the clarity of a winner will then lead markets higher. The truth is that the stock market has historically increased at a higher rate in the six months leading up to a presidential election than in the other 42 months of each 4-year cycle. Uncertainty is always a risk but assuming risk is what you get compensated for as an investor. Avoiding uncertainty or risk may help you sleep better but it generally comes at a cost of lower returns.
Fiction: A Republican White House tends to be more business-friendly which is better for the stock market.
Against conventional wisdom and theory, the data shows that a Democratic president is better for the stock market and the economy. Since the S&P 500’s inception, the stock market has gained an average return of 48.3% during the 4-year terms of Democratic presidents versus 19.3% during terms of Republican presidents. Those figures are measured starting from Inauguration Day but if we change the measurement to start and end on the day after each presidential election, the data remains largely the same: 19.5% average returns for Republicans vs 46.8% vs Democrats.
The broadest measure of economic output – real GDP growth – paints a similar picture. On average since World War II, the economy has grown one percentage point faster under Democratic presidents. Republicans might argue that the greatest economic crises since World War II – the global financial crisis (GFC) of 2008 and the Covid crisis of 2020 – both occurred under Republican presidents and skew the results. However, such an argument falls flat – the gap in real GDP growth between the parties was even wider prior to 2008.
Does this data mean that a Democratic presidential victory in November will be better for the stock market? Certainly not.
It bears repeating that the person in the White House matters much less to the stock market than is perceived. The stock market is NOT a measure of employment growth or GDP growth or border security or abortion policy or government social spending. Over extended periods, the growth of the stock market is determined by how much money Apple and Amazon and Ford and Caterpillar and Exxon and Microsoft and Pfizer make. The profits that companies make will be what drives the stock market up or down – not the domestic and foreign policy agenda of a president.
Fiction: Specific sectors are likely to perform better under a Republican president or Democratic president.
Upon Donald Trump’s election victory against Hillary Clinton in November 2016, market prognosticators were consistent in their view of the sector most likely to benefit from a Trump presidency: Energy. Trump campaigned on allowing more federal land oil and gas drilling, easing environmental regulations on coal companies and fracking, restoring pipline projects including the critical Keystone pipeline, and generally creating a favorable environment for energy companies.
What happened over the following four years of the Trump presidency? The energy sector was an investment disaster – ranking dead last of all sectors by an enormous margin. $1,000 invested in the energy sector at the start of Trump’s presidency became $611 at the end – an annualized loss of 11.6% per year.
Conversely, no forecasters suggested that Biden’s presidential victory in 2020 was going to be a positive jolt for the energy sector. Biden campaigned on rejoining the Paris Agreement, dramatically reduced fracking, and immediately restricting oil and gas drilling. Wall Street sentiment for the energy sector after Biden’s win was somewhere between negative and sell-all-your-oil-and-gas-stocks negative. And yet over the course of the Biden presidency to date, the S&P energy sector – which is comprised almost exclusively by traditional oil and gas companies – has been the best performing sector, doubling the performance of its closest competitor.
Furthermore, consider the other leading beneficiary of Trump’s 2016 victory – the defense industry. Trump campaigned on increasing the size of the military, modernizing the nuclear arsenal, and expanding defense spending. Making matters more favorable for defense companies was that Republicans also won House and Senate majorities in the 2016 election. Defense stocks jumped on the day following the election and Forbes published an article that day titled “For the Defense Industry, Trump’s Win Means Happy Days are Here Again”.
Over the subsequent four years, the defense industry lagged the overall stock market by 44%.
Why are predictions about what stocks and sectors will perform best or worst after an election often so horribly wrong? For the same reasons that forecasters are lousy at predicting what the stock market will do over the next year. There are many external factors that are simply not predictable in advance which will have a dramatic impact on stock prices and the economy. Few, if any, predicted 9/11 or the severity of the Covid pandemic or the overnight collapse of Lehman Brothers and yet these events had dramatic impacts on stock prices. You might have predicted everything else perfectly but if you did not factor these externalities into your predictions of the future, your forecasts were horribly wrong. On this note, it was not Trump’s victory in 2016 and subsequent policies that caused energy stocks to plummet for the next four years – it was the unanticipated increase in global oil production that caused supply to dramatically outpace demand and energy prices to plunge.
Presidential policy objectives will have some impact on industries and sectors. But these policies are 1) known in advance and priced into stocks; 2) often limited by checks and balances within our government such that presidents never achieve all their policy initiatives; and 3) often one small factor among a long list of far more important factors impacting stock prices.
The idea that an investor should favor industries or sectors based on an election result makes for a compelling story that Wall Street will again sell to millions of unsophisticated investors despite the fact that the track record of such advice is abysmal and will likely again be abysmal in the future.
Fiction: We should be concerned about dramatic changes to tax policy under a second term of President Biden or a reelected President Trump.
Here is the reality: Most provisions of the Tax Cuts and Jobs Act (TCJA – “Trump Tax Cuts”) are scheduled to sunset at the end of 2025. If Congress allows TCJA to sunset, the effect is a tax hike on most Americans. Neither party of Congress wants to be blamed for tax hikes and so the most likely outcome – regardless of which party controls Congress – is an extension of TCJA.
Does this change depending on who wins the White House in November? Probably not. Even though an extension of TCJA will add trillions to the deficit, both candidates have demonstrated indifference to deficits. Trump is already campaigning for “his tax cuts” to be extended and while Biden may aspire to only extend the tax cuts for taxpayers below a specific income level, he’s very unlikely to get such a measure passed without a Democratic majority in both the House and Senate.
The most likely outcome – regardless of who wins the presidency – is an extension of the existing tax law.
In Conclusion
While the anticipation of presidential elections can generate considerable anxiety and provoke inquiries about potential adjustments to investment portfolios, the impact of these political events on financial markets is significantly overstated. Historical data and empirical studies consistently demonstrate that the long-term influence of elections on market performance is minimal, with economic growth rates (which are not materially impacted by presidents), interest rates set by central banks, corporate earnings, and exogenous events playing far more pivotal roles. The narrative that elections bring about significant market volatility or that the outcome should dictate investment strategy is largely a myth perpetuated by media coverage seeking to capitalize on the drama for economic gain. Instead, investors are well served to maintain a long-term perspective, understanding that the stock market’s performance is driven by the profits of companies and not by the transient nature of political events. The evidence suggests that neither the party of the president nor the immediate aftermath of elections reliably predicts market movements, making it imperative for investors to resist the allure of speculative decision-making based on election outcomes.
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