Chief Investment Strategist
As we warm up to the US election in November, we wanted to have a look at how presidential elections and equity markets hang together. Do markets affect the election, does the president affect the market, or are the two things completely unrelated? The answer lies somewhere in between.
For this article, we’ve looked at the 13 presidential elections since 1972. This period follows the break of the so-called Bretton Woods system in 1971, which meant unpegging the US dollar from gold, as this fundamentally changed market dynamics. Thirteen elections aren’t enough to establish statistical significance, so any conclusions should be taken with a grain of salt. Further, it is fair to question how much outlier years such as 1980, 1996, and 2008 de- or inflate results, which adds to the point of viewing these conclusions as suggestive at best. Over those 13 elections, 7 have been won by Republicans and 6 by Democrats. Five elections have been won by the incumbent president, 7 have meant a change of the party in power, while one election has seen a new president from the incumbent party in power.
The first question we set out to answer was whether markets perform differently in election years compared to any other year. One could reasonably think the incumbent president would do his best to prop up the economy to look good.
On the surface, this hypothesis does indeed appear true, as the average return for the S&P 500 (not including the reinvestment of dividends) in election years yields 8.7% on average, compared to 7.7% in other years. But, as always, the devil is in the detail. Because due to the concepts of maths, it isn’t feasible to take the average return of election years and compare it with other years. To correct this, we stitch together these 13 years of return data and calculate the combined compounded return during these election years. The annualised return for election years then comes out at 7.8% annualised, which is very close to the compounded return during non-election years, meaning that there isn’t any significant difference.
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