How Much Do Elections Actually Affect The Stock Market?
With the upcoming election, everyone seems to be asking about the effects that it will have on the stock market. It may seem hard to believe, but this isn’t something that you need to worry about. Historically, elections haven’t had much effect on the stock market and neither has the political party in power.
Historical Returns During Election Years
Since 1926, the US stock market has returned about 10% per year. In election years, it has been up a little bit more, averaging 11.6%. In fact, of the 23 presidential elections that have taken place in the United States since 1926, the market has only been down in 4 of those years, which is less than 17% of the time.
During the election years when the market was down, there were much bigger forces at play than just politics. The market lost 8.2% for the year in 1932 when Roosevelt ran against Hoover. That was also near the height of the great depression, which had started long before the campaigning began. The market lost 9.8% in 1940 when Roosevelt ran against Willkie. However, the world was also at war as Hitler’s Germany tried to take over all of Europe.
More recently, in the year 2000, Bush was running against Gore and the stock market dropped 9.1%. But that spring, 8 months before any voting took place, Japan entered a recession and the “dot com bubble” burst. Another bubble’s bursting just happened to coincide with the 2008 election when Obama ran against McCain. When the housing bubble burst, it sent markets into a freefall which resulted in a 37% loss that election year. As you can see, there were much more serious and far-reaching issues at play during these years than just a presidential election.
Historical Returns Based On Political Parties In Power
If the election itself doesn’t sway the stock market, then surely the political party that gains power does, right? That is a common assumption and entirely unfounded. As you can see from the graph below, it appears that the stock market pretty much just likes to go up no matter which party wins the presidency. This shows the growth of a dollar invested in the S&P 500 Index from January 1926 to December 2023.
The US President doesn’t have as much power as many believe because of the checks and balances built into the system. Congress is the one that actually gets to make the laws, after all. The following graph again shows the hypothetical growth of $1 invested in the S&P 500 Index, but this time colored based on which party had control of Congress.
The Real Risk During An Election Year
Is there stock market risk during an election year? Yes, there is. Yet, it doesn’t stem from the market itself. The real risk during an election year is reacting as an investor to headlines and not the underlying data. It is easy to grow concerned when the news and social media are telling you that our country is doomed if a specific candidate wins.
I’m just going to put my money somewhere safe until I see what happens.
I want to pull out of the market until things calm down.
Those are common sentiments about this time during an election year and with the recent volatility in the stock market, you would be hard-pressed to find someone who hasn’t had one of those thoughts flit through their mind at least once. Those are dangerous thoughts, though.
Let’s look at a recent example back in 2020. If you, like many investors, had pulled your money out of the stock market at the end of March 2020, you would have missed out on over 40% growth by the end of that year. To be successful with stock market timing, you have to be right twice—when you pull your money out of the market and when you put it back in. Hardly anyone is that accurate.
Adopting A Healthier Perspective
When it comes to the stock market, past performance is no guarantee of future returns. Will the market go up or down for the remainder of the year? We don’t know. Thinking back to March 2020, we would have guessed incorrectly. What will the stock market do for the next two years or five years? Your guess is as good as ours.
That is why we do not advocate investing in the stock market for one, two, or five years. If you need your money during that time frame, you need to keep it somewhere safer. The stock market is a long-term investment, best for money that you won’t need for decades, like retirement funds. While we wouldn’t dare to predict where the market will be at this time next year, we are fairly confident that twenty years from today it will be higher. We could be wrong, but it has been up in every twenty-year period on record, which gives us hope.
Instead of worrying about the upcoming election, take a long-term perspective on your stock market investing. Don’t check your balance every day, or even every month. The short-term ups and downs will wear on your nerves and only build anxiety. If you look at the graphs above closely, you will see a lot of downturns in them. However, if you take a step back and look at the big picture it’s pretty clear what direction the market has gone over the last almost 100 years.
While it’s healthy to have a long-term perspective relative to your investments, it’s better to have an even longer-term perspective, an eternal one, relative to life itself. Where are you placing your trust? Even a robust stock market will never be enough. In today’s world, it’s important to raise our eyes above the chaos that surrounds us and place them on the Prince of Peace.
Are you looking for a professional who will guide you not only through the ups and downs of stock market investing, but as you live your life and manage your money from an eternal perspective? We can help. Schedule a free call so we can get to know each other and determine what kind of guidance would serve you best.
About Guide Financial Planning
Guide Financial Planning is led by founder Ben Wacek, who is a Christian fee-only Certified Financial Planner™ and Certified Kingdom Advisor®. He has a passion to help people of all income levels make wise financial decisions and steward their resources from an eternal perspective using Biblical principles. Based in Minneapolis, MN, he works with clients both locally and virtually throughout the country and abroad. You can follow the links to learn more about Guide Financial Planning and our team and the services we offer.