Presidential Elections: How Do They Affect Stock Market Performance?

Ever since the stock market became a prominent part of the financial world, investors have wondered how presidential elections impact stock market performance. The answer is – it depends.

Specifically, it depends on a number of factors, ranging from the political party of the incumbent to whether the current president is in his first or second term. The state of the economy in the year of the election also plays a key role in how election results affect stock market performance. Plus, the increased uncertainty surrounding the election tends to affect investors and the stock market as a whole.

Stock Market Performance and the Presidential Election

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For years, many financial analysts believed in the concept of a presidential cycle stock market. However, as the data grew more detailed and analysis techniques more sophisticated, most analysts have abandoned the theory of a predictable election year stock market cycle. Despite the lack of predictability, studying election and stock market results in the same year can yield interesting data that can inform investment decisions. 

A Good Time to Invest

Historical data from the past 80 years indicates that presidential election years offer a great opportunity to invest in the stock market. Since the Great Depression, research on stock market performance by president shows that markets have gone up in 17 out of 21 presidential election years – regardless of which political party won the election. Furthermore, 12 of those 17 years showed double-digit gains, when looking at data from November of the election year to the following October.

Year                                    Percentage +/-                                         Winning Party

1932       – 8.2     Republican
1936 33.9 Democrat
1940 – 9.8 Democrat
1944 19.7 Democrat
1948   5.5 Republican
1952 18.4 Republican
1956   6.6 Republican
1960   .50 Democrat
1964 16.5 Democrat
1968 11.1 Republican
1972 19.0 Republican
1976 23.8 Democrat
1980 32.4 Republican
1984   6.3 Republican
1988 16.8 Republican
1992   7.6 Democrat
1996  23.0 Democrat
2000  – 9.1 Republican
2004 10.9 Republican
2008  – 37 Democrat
2012 16.0 Democrat

Interestingly, the largest uptick and the largest decline in stock market performance in a presidential election year both occurred when the winning candidate came from the Democratic Party. Overall, however, the data suggests investing during presidential election years to be a smart move no matter which party wins. 

S&P 500 Performance During Election Years

Drilling down to the market niche level, research indicates that S&P 500 performance also tends to go up during presidential election years. In fact, since 1928, the S&P 500 has shown positive returns during all election years – except when a new president must be elected. Analysts attribute this anomaly to the greater uncertainty involved in knowing there will be a new president at the end of the year, and to the fact that “lame duck” presidents tend to act with less economic restraint in their final year in office.

 

  • Election years where new president must be elected – – 4.0%
  • All presidential election years – 7.0%
  • All years – 7.5%

Dow Jones Performance During Election Years

When analyzing how election results affect stock market performance, a study of the Dow Jones Industrial average reveals some interesting data. Since 1900, the stock market has tended to produce more favorable returns under Democratic presidents.

  • Republicans – 3% annual returns
  • Democrats – 7% annual returns

President

  Year Return

Roosevelt

1944 -2.1%

Truman

1948  8.4%

Eisenhower

1952  2.3%

Eisenhower

1956 -9.3%

Kennedy

1960 14.6%

Johnson

1964   4.3%

Nixon

1968 14.6%

Nixon

1972 17.9%

Carter

1976 14.9%

Reagan

1980  -3.7%

Reagan

1984 11.8%

Bush

1988 -3.7%

Clinton

1992 26.0%

Clinton

1996  -6.2%

Bush

2000   3.1%

Bush

2004 -33.8%

Obama

2008    7.3%

The data also suggests a trend between market performance and the year of a president’s term. In most cases, the third year of a president’s term in office generates the best market returns, while the final year typically generates the worst.

4-Year Stock Performance by Political Party

Data analysis also indicates that a president’s political party does not have the same impact across the board in terms of large cap stocks, small cap stocks and bond performance. The reigning political party seems to have little impact on the performance of large cap stocks. However, small-cap stocks generally perform better under the Democrats while bond performance favors the Republican Party.

Large Cap

No statistical difference on S&P average 4-year returns:

  • 30% Rep
  • 34% Dem

Small Cap

Better performance under Democrats:

  • 6% – Average real return under Democrats
  • 7% – Average real return under Republicans

Bonds

Better performance for long-term corporate and government bonds under the GOP:

  • Democrat – Negative returns
  • Republican – Consistently positive

Unemployment Rates During Election Years

Unemployment rates also have a measurable impact on election results and stock market performance. Over the past 40 years, all incumbent presidents have been reelected during times of stable or falling unemployment rates, except for 1976 when Ford lost to Carter.

Year

      Unemployment % Trend Incumbent

1976

7.8% Falling Ford

1980

6.9% Rising Carter

1984

7.7% Falling Reagan

1992

7.5% Rising Bush

1996

5.4% Stable Clinton

2004

5.6% Stable Bush

2012

8.2% Falling Obama

Interest Rates During Election Years

Stock market performance research also shows that presidential election years often go hand-in-hand with interest rate hikes. Of the 60 rate hikes that have happened since 1980, nearly one-third (32%) occurred during election years.

Federal Reserve raised interest rates during the election year:

  • 1988
  • 2000
  • 2004

Federal Reserve eased monetary policy during the election year:

  • 1984
  • 1992
  • 1996
  • 2008
  • 2012

Don’t Read Too Much Into History

Although the historical record indicates that the stock market favors Democratic presidents, analysts caution against basing investment decisions primarily on that factor. Instead, many recommend identifying specific sectors and stocks that would be affected by the election winner’s economic and fiscal platform. Even though U.S. presidents hold the most powerful office in the world, they do not have the power to control stock market performance.

About The Author

Kirk Du Plessis

Kirk founded Option Alpha in early 2007 and currently serves as the Head Trader. In 2018, Option Alpha hit the Inc. 500 list at #215 as one of the fastest growing private companies in the US. Formerly an Investment Banker in the Mergers and Acquisitions Group for Deutsche Bank in New York and REIT Analyst for BB&T Capital Markets in Washington D.C., he's a Full-time Options Trader and Real Estate Investor. He's been interviewed on dozens of investing websites/podcasts and he's been seen in Barron’s Magazine, SmartMoney, and various other financial publications. Kirk currently lives in Pennsylvania (USA) with his beautiful wife and three children.