Are presidential elections good for US and global stockmarkets?
How have stockmarkets performed in previous election years? Our analysis points to weaker gains during the race for the White House.
3 November 2016
The US stockmarket rose by a cumulative 73% during the 11 election years since 1972, according to data analysed by Schroders.
The annualised gains for the S&P 500 in the combined election years was only 7% compared to 8% for the whole period between 1972 and 2012.
Ten of the 11 election years registered gains with Nixon and Reagan victories coinciding with the biggest gains.
The trends in the US were reflected in global stockmarkets with the UK’s FTSE All-Share also shown for comparison.
The only election year that the S&P 500, the MSCI World and the FTSE All-Share all registered falls was 2008. The losses averaged 38% that year amid the turmoil of the financial crisis.
However, during the last 11 US election years (not including 2016) stocks on the S&P 500, the MSCI World, and the FTSE All-Share have made a cumulative gains, not including dividends, of 73%, 49% and 74%, respectively. If gains made so far in 2016 are included, these figures jump to 79%, 53% and 86%, respectively.
The S&P 500 has made gains in nine out of the last 11 US election years. The MSCI World and the FTSE All-Share have each gained in eight of these years.
We are told markets hate uncertainty. Given the unpredictability of election outcomes it might, therefore, be surprising to see the frequency with which equities rise in polling years.
Do markets outperform in Republican years?
Traditional thinking goes that a win for the Republicans is better for markets due to the pro-capitalist policies that are expected to follow. The data appears to support the assumption.
However, there is a huge caveat. The Democrat data is skewed by the crash of 2008, the seeds of which had been sown during the tenure of previous presidents.
Adjust the data to remove 2008 and the S&P 500, on average, outperforms in the years when the Democrats won control of the White House.
How do markets perform during a president’s term?
While markets in the year of a presidential election tend to outperform when a Republican wins office, no clear trend emerges on how the S&P 500 performs over the president’s entire term.
For instance, the S&P 500 rose more during Barack Obama’s (Democrat) reign than during Richard Nixon’s (Republican) tenure, while the Reagan (Republican) years outperformed Kennedy’s (Democrat) rule.
Long-term investing vs market timing
There is also a lesson for investors who might choose to time the market, perhaps believing they should buy in election years.
Average returns for those 11 election years were lower than for the entire period between 1972 and 2012.
In the case of the MSCI World Index and the FTSE All-Share Index, you would have been much better off staying invested in stocks over the entire 44-year period, rather than buying and selling in election years.
The average return for the MSCI World and the FTSE All-Share was 8% and 10% respectively per year between 1972 and 2012, compared with 4% and 7% respectively for the election years during the same period.
The S&P 500 also returned a higher average per year between 1972 and 2012 compared with just the election years, although the difference was not so great; 8% compared with 7%.
Taking a longer-term view of their investments would have also helped smooth out the volatility experienced over such a long period, particularly if you had invested in 2008.
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