Markets in times of elections
With the November U.S. presidential election approaching, and with former President Trump leading in the polls while President Biden endorses Vice President Kamala Harris, a key question arises: how do elections affect markets and portfolio returns?
Do elections matter in the long run?
To answer this, let’s look at some historical data. Surprisingly, markets have trended upward no matter which party wins the election. Since 1933, with eight Democratic presidents and seven Republican presidents, the market trend has always been upward. The key is to stay invested!
Landslide victory or balance in Congress?
It’s not just the presidential election that matters. Markets have had good returns regardless of how Congress is composed. Since 1933, there have been 44 years in which one party controlled both the presidency and Congress, with an average return of 14.4%. Even with a divided Congress, returns were almost as good at 13.7%. And even when Congress was of the party opposed to the president, returns were still in double digits (11.7%).
Investor Behavior
Elections impact investor behavior. During election years, many tend to opt for lower-risk instruments. However, right after the election, equity funds tend to see the largest net inflows. This indicates that investors prefer to minimize risk during election uncertainty and reconsider riskier assets once it passes.
Changing strategy during these years can limit long-term portfolio returns.
The history is clear: those who stayed on the sidelines during election years performed worse on 17 occasions, and better on only 3. In contrast, those who stayed invested or made monthly contributions achieved higher average balances.
Conclusion
Although presidential elections can influence market behavior in the short term, staying invested for the long term has proven to be a winning strategy.
Hypothetical historical growth of a US$1,000 investment in the S&P 500
Note: Party control dates are based on opening dates. Values are based on total returns in USD.
Source: Capital Group
Three hypothetical US$10,000 investment strategies during an election cycle
Note: Returns and portfolio values are calculated monthly and in USD. The analysis begins on January 1 of each election year and reflects a four-year holding period. Past performance is not predictive of results in future periods.
Source: Capital Group