8 Surprising Facts About Elections & The Stock Market (Webinar Recording)

Presenters: Andy Pratt, CFA, CAIA and Bijal Patel, CFP®

Here is the webinar recording from August 28, 2024. You can browse topics discussed and main takeaways using the sections and time stamps below:

Click the time-stamp in each section title, and you will jump right to that part of the video in a new screen!

• 3:11 - Surprising Fact #1: The stock market tends to go up in election years
• 4:47 - Surprising Fact #2: The stock market tends to go up under both Dem and GOP Presidents
• 7:57 - Surprising Fact #3: Single party control of White House and Congress doesn’t lead to materially different returns, higher or lower
• 10:31 - Surprising Fact #4: Election years aren’t more volatile than other years
• 12:52 - Surprising Fact #5: The stock market influences the election, not the other way around
• 15:57 - Surprising Fact #6: The Sectors that do well under a particular administration are often different than you’d expect
• 20:41 - Surprising Fact #7: The Fed doesn’t let an election year affect their interest rate decisions
• 24:34 - Surprising Fact #8: The most direct impact from this election may have nothing to do with the stock market

Surprising Fact #1: The stock market tends to go up in election years (03:11)

• Contrary to common belief, stock market returns during election years are not significantly different from other years. In fact, if there's any bias, returns tend to be slightly higher in election years compared to the following year.
• This trend has been consistent going back to the Herbert Hoover era, suggesting that election-related uncertainty does not negatively impact stock market performance.
• While there's often a lot of focus on the election and its potential impact on the markets, the data shows that the stock market doesn't seem to care much about elections in terms of overall returns.

Surprising Fact #2: The stock market tends to go up under both Dem and GOP Presidents (04:47)

• There's a common perception that Republican policies (less regulation, lower taxes) lead to better stock market performance, but historical data doesn't support this.
• The 2016 election provides a clear example of how initial market reactions can be misleading. When Donald Trump unexpectedly won, there was an initial sharp drop in futures markets, but by market open the next day, stocks were slightly up and ended 1.1% higher.
• Looking at long-term data, the stock market has generally trended upward regardless of which party controls the White House. Both Republican and Democrat presidencies have seen market crashes, but overall, the market continues to rise.
• When examining individual presidential terms, while there have been some periods of negative returns, the average stock market return across all presidencies (both Republican and Democrat) has been 9.5%, showing little correlation between market performance and the party in power.

Surprising Fact #3: Single party control of White House and Congress doesn’t lead to materially different returns, higher or lower (07:57)

• There's a common belief that a divided government (gridlock) is good for the stock market, as it prevents major policy changes that could create uncertainty.
• US Bank conducted a study going back to the 1920s, examining all possible combinations of party control over the White House and Congress. They found no statistically significant difference in quarterly stock market returns under single-party control versus other scenarios.
• There were two exceptions that showed statistically significant differences:
  • a) When a Democrat was in the White House with some level of Republican control in Congress, returns were higher than average.
  • b) When a Republican was president with full Democratic control of Congress, returns were slightly lower than average.
• However, Andy cautions that these exceptions might be spurious correlations due to the limited dataset of US elections. He emphasizes that regardless of the political configuration, stock market returns were generally positive across all scenarios.

Surprising Fact #4: Election years aren’t more volatile than other years (10:31)

• Contrary to common belief and analyst predictions, election years do not actually show higher market volatility compared to non-election years.
• T. Rowe Price conducted a study that found, across various time spans, there is not more volatility in election years when it comes to stock market returns. In fact, the data shows a slight bias towards less volatility in election years.
• This finding challenges the idea that investors should reduce their market exposure or take protective measures as elections approach due to anticipated volatility. The data suggests that such actions are unnecessary, as elections don't significantly impact market volatility.

Surprising Fact #5: The stock market influences the election, not the other way around (12:52)

• The assumption that presidential elections or the party in power controls the stock market may be flawed. Instead, it's possible that the stock market influences who wins the presidency, rather than the other way around.
• The stock market is a forward-looking indicator. Large organizations and institutional investors often price in political information ahead of time, potentially influencing election outcomes.
• When the stock market is performing well and making new highs, it tends to lead to the re-election of the current party. This suggests that a strong economy and stock market performance can influence voter behavior more than political promises about future economic performance.
• The markets, being forward-looking indicators, often price in potential policy changes before they occur. This means that by the time average investors are discussing potential impacts of policies, that information is likely already reflected in stock prices.

Surprising Fact #6: The Sectors that do well under a particular administration are often different than you’d expect (15:57)

• Contrary to expectations, sectors that are predicted to do well under a particular administration often perform differently than anticipated. For example:
  • a) Under George W. Bush, energy stocks were expected to thrive but performed poorly due to economic downturn and increased regulation.
  • b) During Obama's presidency, healthcare stocks were expected to suffer due to healthcare reform, but ended up being the second-best performing sector behind tech.
  • c) Under Trump, despite his stance against clean energy, the best-performing stock was Enphase, a clean energy company, which saw a 9,000% increase.
  • d) During Biden's administration, despite a focus on clean energy, fossil fuel companies like Exxon, ConocoPhillips, Shell, and Chevron posted record profits in 2022 and 2023.
• These examples demonstrate that even if an investor could predict election outcomes, positioning a portfolio based on expected sector performance often leads to poor returns.
• The difficulty in predicting sector performance based on political outcomes highlights why it's important to stick with a consistent investment strategy rather than trying to time the market based on election results.
• This unpredictability in sector performance shows that the relationship between politics and market performance is more complex than it might initially appear.

Surprising Fact #7: The Fed doesn’t let an election year affect their interest rate decisions (20:41)

• Contrary to the belief that the Federal Reserve might avoid making interest rate changes during an election year to maintain its appearance of independence, historical data shows that the Fed has made interest rate moves in 16 out of the last 17 election cycles.
• The Fed's actions are driven by its dual mandate from Congress: to maintain maximum employment and price stability. These economic goals don't take a break during election years, so the Fed continues to monitor and act on economic conditions regardless of the political calendar.
• The Fed is typically very transparent about its intentions, holding meetings every six weeks and providing clear direction on its thinking. This suggests that any actions taken during an election year are likely to be in response to economic conditions rather than political considerations, and are unlikely to come as a surprise to the markets.

Surprising Fact #8: The most direct impact from this election may have nothing to do with the stock market (24:34)

• The Tax Cuts and Jobs Act of 2018, which reduced taxes for many individuals and businesses, is set to expire in phases. Individual tax provisions, including changes to standard deductions and income tax brackets, are scheduled to sunset in 2025.
• Business tax cuts from the same act are set to expire in 2028. This means that regardless of which party wins the upcoming election, there will likely be significant work needed to address these expiring tax provisions.
• If the current tax act is simply renewed without changes, the Congressional Budget Office estimates it would add $4.6 trillion to the deficit over a 10-year period. This suggests that some changes to the tax code are likely, regardless of the election outcome.
• A particularly important aspect for many people is the estate tax exemption. Currently set at $27 million for families filing jointly, it's scheduled to revert to a much lower level (around $7.5 million, adjusted for inflation) if no action is taken. This change would affect a much larger number of families and individuals, potentially requiring new estate planning strategies.