The Big Picture: U.S. Elections and the Equity Market
Author: The editor's desk
October 28, 2020
How stocks perform in relation to presidential cycles may be more coincidence than correlation, but the historical relationship is no less interesting for investors to contemplate as the U.S. election campaign enters the final stretch. Here are a few different takes on how politics and equity markets have coalesced over the years.
1. Third Year’s a Charm
The S&P 500 Index has netted positive annualized returns on average in each year of the four-year U.S. presidential cycles since 1960, but it’s the third year in office that has coincided with the biggest gains. And what about the most volatile year of the cycle for stocks? That would be the first year, which corresponds with the largest average standard deviation of returns.
2. Beginner’s Luck
S&P 500 returns were higher on average during the 10 first-term, elected presidencies that have occurred since 1960 than during the five second-term presidencies. Moreover, through this lens, re-elections have been associated with much bigger equity losses and smaller gains. Barack Obama’s first stretch in office, for example, syncs with the highest index return (101%) of any presidential term over this period, while gains during Bill Clinton’s first term rank second (99%). However, both Richard Nixon’s scandal-shortened second term and George W. Bush’s final four years were met with index losses of more than 26%.
3. Red or Blue but Almost Always in the Black
What U.S. political party has a right to boast about their market-friendly history? The short answer is both, given how well the S&P 500 has usually fared when either a Democratic or Republican President has held office during the past 60 years. The one big exception? George W. Bush’s eight-year tenure bookmarked by the Tech Wreck and Great Financial Crisis.
4. It’s Under Control
There have been 30 U.S. congressional terms since 1961, but only 11 of those two-year terms occurred when one of the two major U.S. political parties controlled the U.S. House of Representatives and U.S. Senate, while also holding office at the White House. Meanwhile, in the eight instances of unified Democratic government, the S&P 500 returned 26.7%, on average, or just one-tenth of a percentage point better than the average in the three terms of Republican control.
5. Waiting on a Winner
U.S. presidential elections are rarely disputed. In fact, the Washington Post recently identified the campaigns of 1824, 1876, 1960 and 2000 as the only four in American history to produce contested outcomes. But if it does happen again, investors may want to watch out. Not only did the S&P 500 fall during the month that George W. Bush’s first-term victory was being contested, it also dropped in the 60 days before the election and 60 days after he was officially declared the winner.
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