Debunking the Myths: The U.S. Election & Its Impact on the Markets

U.S. election fever is in full gear — and politics and money are never far apart. Election years are often fuelled by uncertainty about future policies, regulatory shifts and their potential impact on economies. What often emerges is a debate over which political party is best for the economy and the markets. This year’s presidential election has been no exception.

While public policy can influence specific industries and sectors, as well as the broader economic and social climate, the relationship between the governing political party and stock market performance may be surprising — it is often weaker than many political pundits assert. Here are three myths, debunked:

Myth 1: Stock markets outperform in presidential election years. The “presidential election cycle theory” has often attempted to forecast trends in the market based on a presidential term. Some pundits assert that markets outperform in the year leading up to an election as the incumbent president encourages a strong economy to support their reelection. While historical data shows that election-year returns are positive, they do not significantly differ from non-election years. Since 1950, the S&P 500 Index has averaged a return of 9.1 percent in an election year (indicated by “Year 4” in the chart below), not significantly different from the overall average of 8.9 percent. Interestingly, the 12 months preceding an election have exhibited the widest range of market outcomes compared to other times in the election cycle.1

Myth 2: One political party is better for market returns than the other. Historical data suggests that markets appear non-partisan. While the S&P 500 has historically averaged positive returns under every partisan combination, what may be surprising is that the strongest market returns have been correlated with a divided government! As such, some suggest that government gridlock may actually create less policy uncertainty, which can be beneficial for the markets.

Myth 3: Potential policy stances warrant changes to investing programs. While many investors are watching carefully to see how potential policy changes may impact certain industries, sectors or companies’ performance, making changes to an investment strategy at this point carries risks. In fact, there are few consistent outcomes for sector returns in election years.2 Campaign promises do not always result in policy changes. Many policy changes often require time to take effect. Consider also that the success of new policies depends on a variety of factors, including the composition of Congress or the Senate, economic and social conditions, and many others.

A Key Takeaway: Maintain Perspective

Presidential election years often bring significant headlines, which can cause market volatility and tempt investors to adjust their investment strategies. However, as these insights suggest, investment decisions should not be heavily influenced by the outcome of the election alone. Instead, it’s important to distinguish between short-term noise and long-term outcomes. Consider the merits of sticking to a well-structured plan based on thoughtful analysis, regardless of the outcome of this November’s election.

1. https://www.fidelity.com/learning-center/wealth-management-insights/election-2024-market-impact; 2. https://www.fidelity.com/learning-center/trading-investing/election-market-impact