The stock and bond markets have a long history of reacting to presidential elections. According to a report by Dimensional Funds, the market has been favorable overall in 20 of the 24 election years from 1928 to 2020, only showing negative returns four times. However, it is important to note that past performance is not indicative of future results.
The S&P 500, a broad index of stocks, exhibited the following average returns in each year of the presidential cycle since 1933:
| Year | Return |
| Year after the election | +6.7% |
| Second-year | +5.8% |
| Third-year | +16.3% |
| Fourth-year | +6.7% |
It is important to remember that these are averages and that there are many factors that can affect the market. Recessions, for example, are not always predictable. In 2008 and 2020, significant economic factors shocked the economy and bucked the election year trends.
Bonds tend to deliver returns of about 6.5% leading up to presidential elections, significantly less than the 7.5% returns they usually deliver. After midterm elections—so named because they come about two years into a president’s term—the market tends to rebound quickly. But that’s not the case for presidential elections. The Bloomberg Barclays U.S. Aggregate Bond Index was created in 1976 to measure returns for investment grade U.S. bonds. The index includes Treasuries, government agencies, and corporate securities. The sample in graph B is smaller, but in the last 10 presidential election cycles, the U.S. Aggregate has had a positive return.
According to a report by Vanguard, since 1860, a balanced portfolio of 60% stocks and 40% bonds has returned 8.2% under Republican presidents and 8.4% under Democratic presidents. Further, starting from that same time period, election year returns have averaged 8.9%, while non-election years have averaged 8.1%.
The following table summarizes the returns of the S&P 500 index during the presidential election years from 1928 to 2020, taking into account the incumbent party:
| Incumbent Party | Return |
| Democrat | +10.9% |
| Republican | +1.5% |
It is important to note that these are averages and that there are many factors that can affect the market. Recessions, for example, are not always predictable. In 2008 and 2020, significant economic factors shocked the economy and bucked the election year trends.
Intra-year volatility is another factor that investors should consider when making investment decisions. According to a report by GIA, while there is a strong connection between uncertainty and market volatility, an analysis of election year volatility reveals the historical pattern is counterintuitive. Election years typically have lower volatility levels relative to non-election years. The relationship is especially noticeable when 2008 is removed from the dataset. Although 2008 was both an election year and highly volatile, the great financial crisis was undeniably the main driver of volatility rather than political dynamics1. It’s not all sunshine and roses though, using a different source you’ll see a different viewpoint using roughly 95 years of elections ……. perspective matters.
https://advisor.visualcapitalist.com/market-volatility/
It is common for people to let their political beliefs influence their investment decisions. However, it is important to remember that politics and investing are two separate things. As Warren Buffett once said, “The stock market is a device for transferring money from the impatient to the patient.” This quote highlights the importance of having a long-term investment strategy and not letting short-term political events influence your investment decisions.
Another powerful quote comes from Peter Lynch, a legendary investor and former manager of the Fidelity Magellan Fund. He said, “Far more money has been lost by investors preparing for corrections or trying to anticipate corrections than has been lost in corrections themselves.” This quote emphasizes the importance of staying invested in the market and not trying to time the market based on political events.
Regardless of your political beliefs, and regardless of whether the coming election results pleasantly or negatively surprise you remember that while politicians can impact markets, you’d be surprised how often it’s not the impact you expected.
It’s crucial to keep in mind a good CEO, fund manager, etc is there to adapt to changes regardless of who is in office. It is important to have a long-term investment strategy that is based on your individual circ*mstances, financial goals, and risk tolerance. Carefully weigh your options, conduct thorough research, and seek guidance from a trusted financial advisor to make an informed decision that aligns with your investment strategy and your plan for funding the rest of your life on your terms.
Remember, investing is a journey, not a destination. Embrace the process, learn from your experiences, and make informed decisions rather than influenced
At LaCour Wealth Management, we specialize in providing second opinions to clients who already have a financial advisor. We can help you evaluate your current portfolio and provide our honest feedback and recommendations. We understand that investing can be a daunting task, but we’re here to help. Our team of professionals can guide you through the process and help you make informed decisions about your investments. If you have any questions or would like to learn more about our services, please call us at (630) 579-3804 or email me at jp.lacour@raymondjames.com.
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The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of LaCour Wealth Management and not necessarily those of Raymond James.
Please note that this blog post is for informational purposes only and is not intended as investment advice. Every investor's situation is unique, and you should consider your investment goals, risk tolerance and time horizon before making any investment. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including asset allocation and diversification. Prior to making an investment decision, please consult with your financial advisor about your individual situation.
The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. The Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. The Bloomberg Barclays 1-3 Month U.S. Treasury Bill Index includes all publicly issued zero-coupon U.S. Treasury Bills that have a remaining maturity of less than 3 months and more than 1 month, are rated investment grade, and have $250 million or more of outstanding face value. In addition, the securities must be denominated in U.S. dollars and must be fixed rate and non convertible. The ICE U.S. Treasury 7-10 Year Bond Index is part of a series of indices intended to assess the U.S. Treasury market. The Index is market value weighted and is designed to measure the performance of U.S. dollar-denominated, fixed rate securities with minimum term to maturity greater than seven years and less than or equal to ten years. The ICE U.S. Treasury Bond Index Series has an inception date of December 31, 2015. Index history is available back to December 31, 2004.Ðhe Barclays Capital Municipal Bond is an unmanaged index of all investment grade municipal securities with at least 1 year to maturity. The Bloomberg Barclays US Mortgage Backed Securities (MBS) Index tracks agency mortgage backed pass-through securities (both fixed-rate and hybrid ARM) guaranteed by Ginnie Mae (GNMA), Fannie Mae (FNMA), and Freddie Mac (FHLMC). The index is constructed by grouping individual TBA-deliverable MBS pools into aggregates or generics based on program, coupon and vintage. The Bloomberg Barclays U.S. Corporate High Yield Bond Index is composed of fixed-rate, publicly issued, non-investment grade debt, is unmanaged, with dividends reinvested, and is not available for purchase. The index includes both corporate and non-corporate sectors. The corporate sectors are Industrial, Utility and Finance, which include both U.S. and non-U.S. corporations. The Bloomberg Barclays U.S. A Corporate Bond Index measures the investment-grade, fixed rate, taxable corporate bond market. It includes USD denominated securities publicly issued by US and non-US industrial, utility and financial issuers. Ð'dKeep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary.
As a seasoned financial expert with a deep understanding of market dynamics, I can confidently dissect the information provided in the article and offer insights into the concepts discussed.
The article begins by highlighting the historical reactions of stock and bond markets to presidential elections. Drawing on a report by Dimensional Funds, it states that the market has generally been favorable in 20 out of 24 election years from 1928 to 2020, with only four instances of negative returns. This historical perspective sets the stage for analyzing the impact of presidential cycles on financial markets.
The S&P 500, a key stock market index, is then examined in terms of its average returns during each year of the presidential cycle since 1933. The returns are as follows:
- Year after the election: +6.7%
- Second year: +5.8%
- Third year: +16.3%
- Fourth year: +6.7%
This analysis emphasizes the cyclicality of market performance during different phases of a presidential term. However, a crucial caveat is introduced – these figures represent averages, and various factors can influence the market, such as unforeseeable recessions, as seen in 2008 and 2020.
The focus then shifts to bond markets, with the article noting that leading up to presidential elections, bonds tend to deliver returns of about 6.5%, which is less than their usual 7.5% returns. After midterm elections, the bond market tends to rebound quickly, but this pattern doesn't hold as strongly for presidential elections. The Bloomberg Barclays U.S. Aggregate Bond Index is introduced as a benchmark for measuring returns on investment-grade U.S. bonds.
A comprehensive historical perspective is provided by Vanguard, indicating that a balanced portfolio of 60% stocks and 40% bonds has returned 8.2% under Republican presidents and 8.4% under Democratic presidents since 1860. Election year returns, on average, have been 8.9%, slightly higher than non-election years at 8.1%. This data underscores the importance of a diversified investment strategy across political cycles.
The article also touches upon intra-year volatility, highlighting the counterintuitive historical pattern where election years typically exhibit lower volatility compared to non-election years. However, it acknowledges the anomaly of 2008, attributing the heightened volatility more to the financial crisis than political dynamics.
To reinforce the notion that politics and investing are separate realms, the article incorporates quotes from renowned investors Warren Buffett and Peter Lynch. Buffett's emphasis on patience and a long-term strategy resonates with Lynch's warning against attempting to time the market based on political events.
In conclusion, the article stresses the importance of a long-term investment strategy aligned with individual circ*mstances, financial goals, and risk tolerance. It cautions against letting political beliefs influence investment decisions and encourages seeking guidance from trusted financial advisors.
This comprehensive analysis demonstrates the complexity of market dynamics during presidential election cycles, considering both stock and bond markets, historical averages, volatility patterns, and the wisdom of seasoned investors.
