Navigating Market Dynamics During a Presidential Election Year

Another presidential election year is upon us, with a second face-off between two candidates lying in store. As usual, the political chatter is accompanied by heightened attention to the economy and financial markets. In election times, many of our clients tend to share their concerns with us as they fret about potential market fluctuations, looming cash needs, and overall returns.

When asked how we should handle volatility and investment strategy during election years, I typically offer a few key insights and data points based on historical performance trends.

First, since the inception of the S&P 500 in 1923, there have been 24 presidential elections. Of those 24 election years, 19 delivered an overall positive performance despite some short-term volatility. While the good years account for an optimistic 79% of the total, I wouldn’t blame you if you start wondering what happened in the other years.

This is where the second key insight comes in. The years in which the S&P 500 index delivered a negative performance were 1932, 1940, 2000, and 2008. These digits should ring a few bells considering the major events that took place during those years. Economists and analysts agree that those events affected stock market performance far more profoundly than any political activities would have.

The elections of 1932 and 1940 took place during the Great Depression, which was followed by the start of World War II in 1939. In 2000, the dot-com bubble burst, and then 2008 had the world reeling as the Great Financial Crisis struck.

Taking these facts into consideration, we can conclude that, historically, an election year in and of itself had little to do with the overall stock market performance. Nonetheless, we need to also consider worries about volatility, particularly on the part of clients with imminent liquidity needs.

The third insight I’d like to share is that when we drill down into market volatility by presidential election year, we find that since 1928, the number of days marked by sharp market swings was generally limited unless there were also major events during that year (as in 1932, 2008, and 2020). This chart shows us the degree of volatility during election years, by measuring the number of single day stock market returns that were plus or minus 2%.

Without any context, just looking at performance during election years, we could note some correlation between volatility/negative performance with election years. However, if we remove the anomalies (major events) from the data, we see that volatility and negative performance is not driven by the uncertainties of a political landscape.

Positive economic indicators which we see today include a strong labor market, wage growth, overall asset growth, falling inflation, and a strengthening leisure and hospitality market.

It is our belief that we should ignore the narrative – and choose to trust the data. Nonetheless, with this element of trust, we are grounded by prudent investing and consistent rebalancing back to targets.

Our team welcomes the opportunity to meet with our clients and discuss concerns, revisit upcoming goals and objectives, plan for liquidity needs, and ensure that our investment strategy is still aligned to your level of risk tolerance.

-Chad Warrick
Co-President & CEO