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How Presidential Elections Can Affect the Financial Markets

How Presidential Elections Can Affect the Financial Markets

April 01, 2024

As we draw closer to November, we can expect a flurry of political activity with the Presidential Election quickly approaching. Get ready for the familiar sights of campaign ads on the radio and TV, patriotic yard signs, and direct mail flooding your mailbox.

There's a common belief that stock market returns tend to be positive during presidential election years, known as the "election year effect" or "presidential election cycle theory."

Looking at the historical performance of the S&P 500 Index during presidential election years, we see that when a Republican was elected, the average return was 15.3%, compared to 7.6% when a Democrat was elected. Overall, the average return during all presidential election years was 11.28%, with 83% of those years showing positive performance. These statistics reinforce the notion that elections, rather than being a source of uncertainty, have historically been associated with positive market outcomes.

There are many factors that impact stock market returns, and historical patterns may offer some insights. However, it is important to note that past performance is not indicative of future results.  

Uncertainty and Volatility: Presidential election years often bring increased uncertainty, as markets react to potential policy changes and the uncertainty surrounding the outcome of the election. This can lead to higher volatility in the months leading up to the election. 

Policy Impact: Markets may react to anticipated policy changes based on the candidates' platforms. For example, sectors such as healthcare, energy, and financials might experience more significant price swings if there are proposed policy changes affecting these industries. 

Investor Sentiment: Investor sentiment can play a crucial role in market movements during election years. Positive or negative sentiment regarding a particular candidate's economic policies can influence buying and selling decisions. 

Interest Rates: The Federal Reserve's monetary policy, including decisions on interest rates, can impact market performance. During election years, the central bank may adjust policies in response to economic conditions, and this can influence market behavior. 

Global Events: Market activity during election years can also be influenced by global events, economic conditions, and geopolitical developments. These factors may overshadow the impact of the election itself. 

It's crucial for investors to consider their individual financial goals, risk tolerance, and investment horizon rather than solely relying on election year patterns. The "election year effect" is a generalization that may not hold true in every election cycle. As we look ahead to November, let's see how the market unfolds.

Data Source: Morningstar/Ibbotson Associates.

Disclosure: Investing involves risks, and investment decisions should be based on your own goals, time horizon, and tolerance for risk. The return and principal value of investments will fluctuate as market conditions change. When sold, investments may be worth more or less than their original cost. Past performance is not a guarantee of future results. Standard & Poor's is a corporation that rates stocks and corporate and municipal bonds according to risk profiles. The S&P 500 is an index of 500 major, large-cap U.S. corporations. You cannot invest directly in an index.