By Andy Mardock, CFP®
Needless to say, this election cycle has been surprising, unsettling, and at times downright nerve-wracking. We get it; we are concerned civic participants too. With an excess of negativity in the media regarding the upcoming election, we wanted to tackle a very basic question: How have markets behaved during election years in the past? Our goal is to put historical context around this always uncertain once-every-four-year event.
First, the highlights:
- Markets have, historically, been indifferent to the U.S. election cycle;
- Discernible patterns are nearly impossible to identify; and
- There will be winning and losing sectors as a result of the election; we just don’t know which they are yet.
Now, let’s tackle each point:
The market is indifferent: While much is made of stock market outperformance or underperformance during a particular political party’s tenure in the Oval Office, the factors influencing stock prices are so vast, so widely out of one person’s control that predicting the market’s direction based on who is elected to the Oval Office is tantamount to tea leaf reading.
Lack of discernible patterns: Analysts often mine historical data in search of patterns that aid in beating the market. The reality? While pundits are looking backward, the stock market is focused on the future. Looking to the past for outperformance is like driving in the rearview mirror. Furthermore, factors such as geopolitical events, technological innovation, and demographic changes, to name only a few, can quickly derail a pattern strategy’s money-making potential.
Winning and losing sectors: Whoever is elected will create or remove policies that benefit some sectors while harming others. Energy policy may favor fossil fuel producers or renewable energy companies, the military budget will impact the contracts defense and aerospace businesses garner, and financial regulation will affect the role of banks in our system. At this point in the cycle, knowing which party will be elected and how the future president’s policies will play out requires a crystal ball to foresee.
Takeaway: The stock market has survived strange election cycles as well as harrowing periods in our country’s history. This time, too, it will persevere. To illustrate this point, we’ve attached a graph that shows how U.S. company stocks (as measured by the S&P 500 index) have performed during and after an election year. Additionally, we included a graph that shows the S&P 500 index’s performance throughout presidential terms.