How Do Presidential Elections Impact the Stock Markets?

Whether you are following the 2020 Election on CNN or Fox News, the media coverage feels like a game show and the counts seem to drag on and on. The team at IMPACTfolio is watching the stock markets closely in preparation to answer any client questions about their portfolio. Recently we shared a webinar discussing how presidential elections affect the stock markets and wanted to provide additional insight.

A Fidelity article written earlier this year broke down the comparison of 6 outcomes: a Republican president, a Democratic president, a Republican sweep, a Democratic sweep, a Republican president with a divided Congress, and a Democratic president with a divided Congress. As you can see in the chart below, historically the clear winner for stock market returns was a Democratic president with a divided Congress.

Dark blue bars in the right panel indicate returns during the first 2 years of a president’s term. The light blue bars show the 4-year return. Monthly data since 1789 (mix of S&P 500, Dow Jones Industrial Average, & Cowles Commission). Source: FMRCo

If the 2020 election results in a Democratic president with a divided Congress, why might the stock markets react favorably? 

• The delayed election results prove the system is actually working.
• Possible end to the trade war with China.
• Most likely another stimulus package will pass before the end of 2020.
• Significant tax law changes may be more difficult to pass with a divided Congress.
• Fed chairman Jerome Powell has indicated that the Fed will keep interest rates near zero until at least 2023. He has stated that if Congress fails to pass additonal fiscal stimulus, the Fed has additional tools to help stimulate the economy.
• Market movements during COVID-19 have been more reflective of sentiments than substance.

Although politicians can be positive or negative for the economy, capitalism is a far more powerful force. Incentives to create new products and services, which fuel jobs, will remain intact as we move forward in our economy. We know the stock market will continue marching on and has already priced in the current risks and opportunities. No matter who wins the 2020 election, the stock market tends to efficiently price in changing information within minutes.

Instead of focusing on the short-term fluctuations in the market, we suggest maintaining an appropriate long-term asset allocation. In the big picture, this election is just noise. Trying to correctly time the markets twice (both when to sell to cash and when to invest back in the markets) tends to be a stressful challenge.

Julie Fletcher McDaniel, CFP®, has been in the financial services industry since 2006.  She is a co-founder of IMPACTfolio, a wealth management firm that specializes in IMPACT investing and holistic financial planning for one flat-fee.