Macro: Sandcastle economics
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The connection between US elections and market performance
US Election
Peter Garnry
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.
Does the election year impact market performance?
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.
Does the equity market impact election results?
The next question we could drum up was whether equity performance could say anything about who would win the election. After all, the equity market is one of the best barometers we have on economic sentiment and the outlook for the economy. It sums up the aggregate opinion about the future, and thus a rallying equity market into election day indicates an improving outlook, which in theory should be positive for the party controlling the White House. Here, we looked at the annual return of the S&P 500 in election years with and without a change of the guard. Based on the above graph, one could make the weak claim that a strong US equity market adds tailwind for the party controlling the White House. However, we cannot conclude that there is any causation between equity market performance and election winners.
Does the equity market favour a party in power?
The final thing we wanted to investigate was whether markets prefer a Republican or Democratic president. To do so, we looked at S&P 500 returns in the year following the election date. Interestingly, we observe significantly higher returns one year after the election if a Democratic president was elected. However, as for the general premise of this article, it is important not to view this in a vacuum, as these results are to a certain extent the result of outlier years such as 1976, 1996, and 2020.
In conclusion
Based on this analysis, the strongest conclusion is that we haven’t had enough elections since the break of Bretton Woods to conclude anything definitively. Although the data at hand shows that there isn’t any significant difference in stock market performance in election years compared to other years, there is a tendency for the incumbent party to stay in power in years with strong equity performance. Finally, the year after elections, markets have performed better with a Democratic president than with a Republican over this 13-year period, although it seems to be skewed by events unrelated to party politics.Related Articles
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