The punchline to my commentary here is that presidential election outcomes have little to do with long term market performance. That said, there are several ways people have analyzed stock market performance to try and come up with ways to predict moves based on party control of the White House, House and Senate.
Below is a summary of this analysis that should demonstrate historical market performance is not dependent on which party is in control of the White House and Congress.
Does the Party in the White House Make a Difference to the Markets?
Here is a chart that clears up the question: “Does the party who is in the White House matter when it comes to market performance?” The simple answer is No.
Does Party Control of Congress Matter?
There are several machinations of scenarios where one-party controls either the House, the Senate or both and does not control the White House. Can that tell us anything? Again, the markets do experience some short-term volatility around election cycle changes but over the long term, there is no real measurable difference in performance.
Election Years Make Me Nervous
We see now that it doesn’t really matter which political party is in power when it comes to long term market performance comparisons. While that may be the case, investors are often much more nervous about the market in election years than most other years. Below is some analysis done that looks at returns under 3 scenarios of investor behavior in election years. The average ending value in each scenario is after a four-year holding period.
Fully Invested
This investor isn’t concerned about election uncertainty and invests the full $10K on January 1 of the election year.
Consistent Contributions
Similar to a 401(k) retirement plan, this investor invests $1K in each of the first 10 months of the election year.
Sitting on the Sidelines
Nervous about how elections affect markets, this investor waits until January 1 after the election results to invest the full $10K.
The numbers again argue that staying invested during uncertain times is the way to go to maximize long term performance.
Is Gridlock Good?
One thing that is likely to happen is that the election outcome will leave us once again with a divided government. Divided governments generally mean that we won’t see anything even vaguely controversial in the upcoming Congress which means we can anticipate that current fiscal policies will remain in place. Markets like predictability. A do-nothing Congress allows corporations to be more confident in their near and intermediate planning efforts anticipating that they won’t get blindsided with tax law changes or fiscal policy changes that would impact them.
Arguments can be made that support and dispel this notion but, in the end, I do believe that when policy making grinds to a crawl, markets generally do better for the reasons above. Different sectors may be more impacted than others such as healthcare, energy, technology and financials. Impacts there can be tied to tax and regulatory policies.
Wrapping Up
I could go on and on about all the various ways analysts try to figure out if there is any sure way to gain outperformance by making decisions based on which political party is in power. As it always is with statistics, you can find a timeframe that may support various election investing theories but at the end of the day, it doesn’t really matter.
One might argue that this time around may be different. Due to the narrow margins of control in the House and Senate, we find ourselves in a situation where politics may drive our government into a shutdown in the coming weeks. Historically, these impasses do not have any lasting impacts on the market but time will tell. We have been in this situation before and came out fine in the end. Our recommendation will always be to stay invested.
P.S. Even ChatGPT concludes with “Ultimately, investing decisions should be based on a comprehensive analysis of various factors rather than relying on the political party in power at a given moment.”
