As The Election Approaches, What Might Happen With The Stock Market?

Sex, lies and accusations of corruption - no election year is complete without them. And while the 2020 election has proven to be one of the most contentious in recent history, contention is nothing new in the world of politics. From the political match-up of Jefferson v. Adams to this year’s Biden v. Trump, mud has always been slung, accusations have always been made and many Americans have found themselves uncertain of a future under new (or unchanged) leadership.

While Adams and Jefferson didn’t shy away from printed ads and public debates, there’s something vastly different about today’s political climate - 24/7 access to constituents. Social media, email blasts, phone calls, television ads, radio announcements - today’s candidates and their associated parties have the ability to inundate Americans with their messaging.

Pair this with the fact that 2020 has been anything but ordinary (which, of course, no one needs reminded of), and you have an election year truly like no other.

As investors, we worry about the aftermath and its correlation to our investment dollars. It's normal to see some emotional swings and reactions that influence buyers and sellers of financial products in our country. It's natural. But is there really any correlation? Let's examine the past.

First, A Reminder About the 24/7 News Cycle and Emotionally Driven Investing

Whether you’ve been guilty of it yourself or you’ve seen others take part, social media channels like Twitter and Facebook make it all too easy to share damaging, misguided or opinionated messaging. This is true in any instance, but it can be especially effective when these posts are about political candidates.

The problem is, being inundated day in and day out with information about our country’s political future (especially information that’s alarming or scary) can take its toll on anyone watching or listening. You’ve already heard the predictions - “If Biden wins, the stock market is sure to tank.” Or, “If Trump wins, the stock market is sure to tank.” People everywhere (whether they’re journalists or your Aunt Sally) are making an argument for it either way. Some of these predictions will be right and some won't. Maybe the predictions will be right for a week or two. Maybe longer. Think about the pandemic. After the fallout of the first quarter and business shutdowns coupled with high unemployment levels, who could have predicted we'd reach all-time market highs in 2020?

As an investor, it’s important to make a conscious effort to drown out the noise, think about your personal financial goals and keep in regular contact with your investment advisor. He or she can offer the educated, unbiased advice you need to stay on track and unswayed when it comes to preparing your portfolio for any potential changes in political leadership.

OK, Now Let's Look At Historical Stock Market Performance During and After Election Years

Of course, past performance is no guarantee or indicator of future performance. But as an investor, it may interest you to see how the stock market has performed historically during and after presidential elections years. Below we’ve charted out the S&P 500 returns since the 2000 election:¹  

Additionally, below shows the S&P 500’s percentage of return during a president’s full term dating back to 1981. This information was gathered from YCharts and presented by Forbes:²

Historically speaking, there have been a number of outside factors that determine the stock market’s performance - more so than simply which party is in power. These other factors could include whether or not we’re in a bull or bear market, the business cycle, civil unrest (at home and overseas), trade wars, tax policy changes and more.

In fact, we could probably all agree that the returns above had a lot more to do with external factors OTHER than which politician was in power or which party controlled the White House. It's normal for emotional reactions to dictate financial markets in the days and weeks following an election, but memories of most investors are short. Things tend to stabilize and prices tend to adjust or re-adjust to information regarding our broader economy once the dust settles.

If the upcoming election has you worried about the future of your portfolio, take some time now to speak with your investment advisor or financial planner. They may be able to provide important insights into whether or not your asset allocation should be readjusted and review any contingency plans you may have already put in place.