How Presidential Election Years Affect the Stock Market
By David K. MacLeod, CFA, CFP®
Election season is in full force here in the United States, but Tuesday, November 5th, 2024 still feels a long way away. Between election uncertainty and geopolitical events, we shouldn’t be surprised if stock market volatility rises. You may be wondering what to expect from the rest of this presidential election year.
For the purposes of this article, we’ll focus on the influence of an election year on the U.S. stock market. As financial planners located in Orange County, CA, we’ve been in business for eleven U.S. presidential election cycles. When we opened our doors in 1984, Ronald Reagan and Walter Mondale were the frontrunners in the election that would re-elect Reagan later that year. We have market insights to share that may be relevant for the current cycle.
We want to first stress that we do not advocate trading or market timing based on election forecasts. We also want to discourage following a seasonal investment strategy that moves in and out of the stock market based on historical patterns around elections.
At one time, the Presidential Election Cycle Theory was a relatively popular theory proposed by Yale Hirsch. Hirsch believed that the third and fourth years of a presidential term have the best stock market returns. But there are exceptions to the average. If you had followed this theory and invested more aggressively in early 2008 (an election year and George W. Bush’s final year in office) you would have been more than a little disappointed. There is no rule that says any season or year is the best time to invest.
When we review presidential election history, election results have made no meaningful difference to how the stock market performed. Looking back to 1932, according to Capital Group research, U.S. stocks have trended up regardless of whether a Democrat or Republican won the White House. That said, investing through an election year can be nerve-wracking.
Market volatility tends to increase during the uncertainty of presidential primaries. You’ve undoubtedly heard reports on the news of big point swings up and down in the stock market in recent times. However, according to the Capital Group, patient investors benefit as the U.S. stock market tends to perform better than average in the 12 months following the end of presidential primaries. As always, however, we don’t try to time the markets around election expectations.
Whether Joe Biden, Donald Trump, or another candidate in the race wins the White House, we wouldn’t necessarily recommend making dramatic changes to a sound investment plan. If you don’t feel confident in your current plan, feel free to call us and speak with one of our Certified Financial Planner (CFP®) advisors. You can also schedule a time with us here.