It’s that time again. Every four years, investors have to grapple with the volatility and uncertainty that comes with a presidential election. As financial professionals, we field a lot of questions from our clients and friends about how politics and elections affect financial markets.
Investors ask: “Politics aside, which way is best for my bottom line?”
Would you believe there’s not much difference?
The chart below shows the stock market’s historical performance, whether a D or R appears after the President’s name. As the chart shows, the best average annual returns have come in periods when one party is in the Executive Branch while the other party holds the reins of one or both bodies of Congress.
But it’s important to remember that past performance does not guarantee future results.
Why is that? Maybe the system works best when a diverse group of ideas meets face-to-face and comes to a compromise. Or maybe Wall Street has learned how to adapt to the goings on in the District of Columbia.
You may be incredibly passionate about the election’s outcome. It goes beyond the White House, too. There are Senate seats, seats in the House, and a wide variety of state and local issues on the ballot this year. Voting is one of the pillars this country was founded upon, so many of you are reading up and making careful choices about the nation’s future. While much focus goes on the presidency, what happens in the House of Representatives and Senate can have a more significant influence on the policy agenda in 2025 and beyond.
In the table below, you can see the gross domestic product (GDP) has fluctuated depending on who’s in the White House, but it has generally trended higher over the long term. The same can be said about inflation, as shown by the Personal Consumption Expenditure price index. It has fluctuated over time but has stayed in a range over the long term.
That does not minimize the challenges many have had with inflation in recent years. But it does help put today’s higher prices in perspective.
If the party in power doesn’t drive stock market performance, what does? Well, many factors, as today’s financial markets are highly complex and interconnected in ways that are not always easy to identify. Any simple explanation is going to leave out a lot of detail. However, markets are driven by four main categories of factors:
#1: Corporate profitability.
#2: Interest rates.
#3: Investor confidence in markets and their expectations of future performance.
#4: Global markets.
The U.S. economy is a massive (nearly $30 trillion GDP) and complex system influenced by a wide range of factors, including what happens “inside the Beltway.” GDP and inflation are just two measures to examine. You can also look at historical data on unemployment, interest rates, and the financial markets. From the highest level, the research tends to conclude the same thing: “It’s all about time in the market, not timing the market.”
Elections can cause some anxiety as we enter the home stretch. Election years can be emotional, and tensions seem pretty high in 2024. When we help develop financial strategies, we consider major and minor events and we prepare for volatile periods. As a result, no matter the outcome, keeping focused on your investing goals as the election approaches and trying to avoid overreacting to short-term market volatility is key. If you do not have someone guiding you through the ups and downs of life, we would be happy to help.
Sources:
Schwab.com, September 30, 2024. “Party in the USA: Election Facts”