equities  |  october 9, 2020

How Might the Presidential Election Impact the Stock Market?

The market has experienced fluctuations under all presidents, with only a modest decrease in average returns during election years.

 

Key Insights

  • Historically, U.S. stocks performed well over longer time periods through both Republican and Democratic administrations.

  • Anxiety over the coming election might tempt you to change your investment strategy, but doing so could harm your portfolio in the long run.

  • We believe the potential outcome of the election alone should not be a deciding factor when it comes to your long-term investment strategy.

Larry Puglia

Portfolio Manager, U.S. Equity Division

Eric Veiel

Co-head of Global Equity and Head of U.S. Equity

Judith Ward, CFP®

Senior Financial Planner

2020 has not lacked for dramatic news headlines, with the most recent nail-biters involving the fast-approaching U.S. presidential election. While election uncertainty may send pulses racing, we would advise investors not to allow a singular event to lead them into acting impulsively when it comes to their investment portfolios.

“One might expect stock market performance in the first year of a president’s term to be an indicator of an election-related response,” says Judith Ward, CFP®, a senior financial planner with T. Rowe Price. “Throughout history, however, we have seen up and down years regardless of which party was in power.” (See “S&P 500 Annual Returns and Presidential Elections”). 

S&P 500 Annual Returns and Presidential Elections

1945 through 2019

This chart looks at the S&P 500 Annual Returns (gains and losses) and each democrat- or rebpulican-elected from 1945 to 2019. For democrat-elected, the chart shows 8 positive and 1 negative. For republican-elected, the chart shows 4 positive and 6 negative.

Sources: Standard & Poor’s and T. Rowe Price analysis using data from Phoenix Performance Reporting Tool. S&P 500 data include proxy returns prior to a formal index in 1957.

Past performance cannot guarantee future results. All investments are subject to market risk, including the possible loss of principal. Investors cannot invest directly in an index.

The Big Picture

In fact, data reveal that the long-term performance of U.S. large-cap equities has shown almost no correlation with the party in power. The S&P 500 Index delivered an average annual return of 11.4% over the past 92 years, with only a modest decrease in the average annual return during election years compared with other years. (See “Calendar Year Returns for the S&P 500 Index”).

“Investors should not let the political environment weigh too heavily on their strategy because stocks have done well over longer time periods during both Republican and Democratic administrations,” says Larry Puglia, portfolio manager in the U.S. Equity Division.

Calendar Year Returns for the S&P 500 Index

12/31/1927 through 12/31/2019

This chart looks at Calendar Year Returns for the S&P 500, other years, and all years from 12/31/1927 through 12/31/2019 when looking at number of years, average annual return, highest year return, and lowest year return. For "number of years" it shows for election years 23, other years 69, and all years 92. For "average annual return" it shows for election years 10.7%, other years 11.6%, and all years 11.4%. For "highest year return" it shows for eletion years 37.9%, other years 52.3%, and all years 52.3%. For "lowest year return" it shows for election years -37.0%, other years -47.1%, and all years -47.1%.

Source: Bloomberg Finance L.P.; analysis by T. Rowe Price. We use the S&P 500 Index total return (gross of dividends) for all calculations in this note.

Past performance is not a reliable indicator of future performance.
S&P 500 data include proxy returns prior to a formal index in 1957.

Our fund managers are aware of the potential short-term impact that the election could have on the stock market; however, they are more focused on the fundamental issues that typically determine longer-term equity performance.

“It may be tempting for investors to try to link election results to market outcomes, but there is really no consistent relationship between which party is in charge and long-term investment success,” says Eric Veiel, co-head of Global Equity and head of U.S. Equity.

A History of Recovery

No matter who is elected president in 2020, the economy is likely to still be in recovery mode going into 2021. As the coronavirus pandemic remains an ongoing source of economic uncertainty, it would not be surprising if markets continued to experience bouts of volatility in the upcoming months and beyond.

Although the sources of the present market environment are unique, historically, the stock market has been through, and recovered from, market corrections and more severe bear markets, which have been spurred by a wide variety of causes. (See “Bull Market Gains Historically Exceeded Bear Market Losses”).

Bull Market Gains Historically Exceeded Bear Market Losses

Bull and Bear Markets in the S&P 500 Index
1970 through August 2020

This graph looks at the S&P 500 from 1970 to August 2020 showing that bull market gains have historically exceeded bear market losses.  Highlighting particulary on the stagflation in 1970s, oil embargo in 1973-1974, credit controls in 1980, black mondy in 1987, iraq invades kuwait in 1990, tech bubble crash in 2001, financial crisis 2008 (noting that the 2008 financial crisis was followed by the longest running bull market in history), and coronavirus in 2020.

Sources: Standard & Poor’s and T. Rowe Price analysis using data from FactSet Research Systems Inc. All rights reserved.

Past performance cannot guarantee future results. All investments are subject to market risk, including the possible loss of principal. Investors cannot invest directly in an index.

We believe that factors beyond the control of any elected official have historically played the most significant role in determining overall equity returns. Therefore, in our view, the potential outcome of an election should not be the sole deciding factor when it comes to your long-term investments.

Focus on Asset Allocation and Diversification

Although individuals may be tempted to react to political headlines, we encourage them to remain focused on their long-term financial goals.

“It‘s important to have an asset allocation that appropriately aligns with your investment time horizon, regardless of the political environment,” says Ward.

Anxiety over the results of the coming election may tempt you to make changes to your investment strategy, but doing so could be harmful to your savings in the long run. In our experience, acting on emotions can lead investors astray.

“Just in 2020, we saw extreme volatility in the early spring followed by a strong market recovery in the late spring and summer months,” said Ward. “Investors who were understandably anxious might have strayed from their strategy and missed the rebound.”

While it may take patience and diligence, being able to maintain a long-term perspective and keep your strategy on track may provide the best results in the long run.

Additional Disclosures

Bloomberg Index Services Limited. BLOOMBERG® is a trademark and service mark of Bloomberg Finance L.P. and its affiliates (collectively, Bloomberg). BARCLAYS® is a trademark and service mark of Barclays Bank Plc (collectively, with its affiliate, Barclays), used under license. Bloomberg or Bloomberg’s licensors, including Barclays, own all proprietary rights in the Bloomberg Barclays Indices. Neither Bloomberg nor Barclays approves or endorses this material, or guarantees the accuracy or completeness of any information herein, or makes any warranty, express or implied, as to the results to be obtained therefrom and, to the maximum extent allowed by law, neither shall have any liability or responsibility for injury or damages arising in connection therewith.

The S&P 500 Index is a product of S&P Dow Jones Indices LLC, a division of S&P Global, or its affiliates (SPDJI), and has been licensed for use by T. Rowe Price. Standard & Poor’s® and S&P® are registered trademarks of Standard & Poor’s Financial Services LLC, a division of S&P Global (S&P); Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC (Dow Jones). T. Rowe Price’s product is not sponsored, endorsed, sold, or promoted by SPDJI, Dow Jones, S&P or their respective affiliates, and none of such parties make any representation regarding the advisability of investing in such product nor do they have any liability for any errors, omissions, or interruptions of the S&P 500 Index.

Important Information

This material is provided for informational purposes only and is not intended to be investment advice or a recommendation to take any particular investment action.

The views contained herein are those of the authors as of September 2020 and are subject to change without notice; these views may differ from those of other T. Rowe Price associates.

This information is not intended to reflect a current or past recommendation concerning investments, investment strategies, or account types, advice of any kind, or a solicitation of an offer to buy or sell any securities or investment services. The opinions and commentary provided do not take into account the investment objectives or financial situation of any particular investor or class of investor. Please consider your own circumstances before making an investment decision.

Information contained herein is based upon sources we consider to be reliable; we do not, however, guarantee its accuracy.

Past performance is not a reliable indicator of future performance. All investments are subject to market risk, including the possible loss of principal. Diversification cannot assure a profit or protect against loss in a declining market. All charts and tables are shown for illustrative purposes only. Actual outcomes may differ materially from expectations or forward-looking statements.

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