How Do Election Periods Impact Markets?

Jonathan Adomait |

A frequent topic that is brought up during election years is whether or not the election cycle will impact investment returns. Today we will be looking at the data, and what you see might surprise you!

Historically, election years have yielded positive results for the stock market, with slightly above average annual returns.  Going back to early 1950's, U.S stock market returns have averaged a compound annual growth rate (CAGR) of 10.50%, whereas during election years they have averaged a CAGR of 11.28%. (Source: First Trust) If a Republican nominee is elected president, the average market return during the election year has been 15.3%, while when a democrat the average election year return was 7.6%. (See chart below)

During the election cycles, only two presidents had a negative stock market return during their leadership - President Nixon and President George W. Bush. President Clinton had the highest stock market return during his presidency, although his time in office finished right as the 2000's technology bubble was imploding.

If you only invested during periods of Democratic leadership or Republican leadership, that would be a losing strategy. The chart below illustrates that only investing in the S&P500 during the periods of Republican leadership would have resulted in a CAGR (compound annual growth rate) of 2.80%, while during democratic leadership that result increases to a CAGR of 5.11%. As shown, staying invested during both presidential periods would have yielded the best results.

Another interesting point to add, the best stock market results tend to come from a divided congress, where one party will control the House or Senate, and the other party controls the second chamber. (See chart below)

So, what is the takeaway? While election years can cause short term volatility and uncertainty in the markets, generally these are strong periods of performance and it's better to focus on longer term objectives.



Jonathan Adomait
Financial Planner | CFP, CIM, B.Eng