S&P 500 Performance During US Presidential Elections: A Historical Analysis
The relationship between the US presidential elections and the performance of the S&P 500 has long intrigued investors. Elections introduce policy uncertainty, and the potential shift in government leadership adds another layer of market volatility. By examining historical data, we can better understand the stock market’s behavior during these critical periods.
Historical overview
Since the birth of the S&P 500, 19 out of 23 election years (1928-2020) have yielded positive returns. This makes up an astonishing 83% of those periods. Consequently, we can assess that the overall trend is clearly bullish without minding the uncertainty elections bring.
Across all US presidential elections, the S&P 500 has posted an average return of 11.28%. However, there are clear distinctions depending on the election outcome and the incumbent party. Historical data suggests that when a Republican candidate was elected, the average return stood at 15.3%, much higher when compared to 7.6% following a Democrat win.
It’s worth noting, that when a Republican took office, the market often responded more favorably, possibly reflecting investor optimism about more market-friendly fiscal policies and deregulation typically associated with Republican administrations.
Market’s behavior before and after elections
Based on a hundred years of data, the S&P 500 tends to perform better in the six months prior to the elections. Here, returns are generally higher as investors anticipate the potential outcomes and price in expected policy shifts. Following election day, the market often experiences lower returns and higher volatility. This is particularly true in cases where the incumbent party loses, as the market reacts to potential policy changes and the uncertainty a new administration might bring.
Volatility is a hallmark of election years, particularly in the months leading up to election day. It tends to peak in the month before the election, driven by the uncertainty surrounding the election outcome and the policies that may follow. Once the election results are known, volatility generally declines, but it remains higher if there is a change in the ruling party.
Year returns of the last 6 elections by president
A closer look at individual election years highlights some interesting patterns in S&P 500 performance:
- 2020 (Biden): 18.02%
- 2016 (Trump): 11.77%
- 2012 (Obama): 15.89%
- 2008 (Obama): – 36.55%
- 2004 (Bush J.): 10.74%
- 2000 (Bush J.): – 9.03%
In the two negative returns cases, external economic factors heavily influenced stock market performance. For example, the 2008 election took place during the financial crisis, resulting in a sharp decline in the market, while the 2000 election coincided with the burst of the Dot-com bubble. Conversely, the 2016 election saw positive returns, even as the political landscape shifted dramatically with the election of Donald Trump.
Not taking into consideration the economic disasters of the past 25 years, the overall trend in election years remained bullish. Furthermore, the historical pattern of rising S&P 500 in the preceding 6 months happened 4 out of 6 times (if we look at the current 2024 election year, and consider it a part of the global picture, 5 out of 7).
Last 6 post-election years trends
The S&P 500’s behavior in the months following an election is mixed, depending on economic conditions and the extent of policy uncertainty. Take a look at the beginning of the new century:
- 2021 (Biden): 28.47%
- 2017 (Trump): 21.61%
- 2013 (Obama): 32.15%
- 2009 (Obama): 25.94%
- 2005 (Bush J.): 4.83%
- 2001 (Bush J.): -11.85%
We can conclude that in the year post-election, the S&P 500 positively shook off election-term uncertainty, outperforming its last year’s dynamic. On the other hand, 2021, 2017, and 2009 were all recovery years for a battered S&P, which makes their dynamic not completely trustworthy.
Historically speaking, we would consider George Bush Junior’s post-election performance more representative, as the US market trends less to the upside after all election expectations had already been priced in. The average total return after an election year stands at -2.2%.
Concluding thoughts: A balanced perspective
While historical data provides valuable insights, it’s crucial to recognize the limitations. Market performance during election years is influenced by a myriad of factors, including economic conditions, geopolitical events, and policy changes, beyond just the political outcome.
The broader lesson from historical data is that while presidential elections are significant political events, the stock market’s long-term trajectory is more closely tied to broader economic forces and global economic trends.
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