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The Impact of Presidential Elections on the Stock Market

3 Mins read

As a professional copywriter, I understand your concerns about how a Trump or Biden presidency may affect the stock market, bond market, and your retirement plans. However, let’s take a closer look at the historical data:

Since 1936, if you had invested in the U.S. stock market during an election year and left your money untouched while reinvesting the dividends, you would have enjoyed an average return of 10.5% per year if a Republican president was elected. On the other hand, if a Democrat was elected, the average return would have been slightly higher at 11.2%. These figures come from Matt Topley, the president of Lansing Street Advisors, a wealth-management firm and family office in Ambler, Pa.

While this data may suggest a slight advantage for Democrats, it is important to note that we are dealing with a small statistical sample, and these numbers do not account for inflation.

Historical Performance:

Let’s dig deeper into the historical performance during specific election years. If you had invested in 1952 (when Dwight D. Eisenhower, a Republican, was elected), 1980 and 1984 (Ronald Reagan, Republican), or 1988 (George H.W. Bush, Republican), you would have experienced particularly favorable returns. Similarly, investing in 1944 (Franklin Roosevelt, Democrat), 1948 (Harry Truman, Democrat), or 2012 (Barack Obama, Democrat) would have also been profitable, according to Topley’s data.

Looking Beyond Election Results:

It’s essential to remember that the stock market isn’t as concerned about elections as we are. Excellent companies demonstrate remarkable resilience in the face of constant change, including the turbulence brought about by presidential elections. Will Kellar, a partner at Human Investing, a financial-planning firm in Lake Oswego, Ore, believes that the market’s long-term performance isn’t heavily influenced by election outcomes.

In conclusion, the data suggests that the impact of presidential elections on the stock market may not be as significant as we perceive it to be. Good investment decisions should be based on careful analysis and a long-term perspective rather than focusing solely on the outcome of an election.

The Relationship Between Elections and Markets

Introduction

Volatility During Election Years

During election years, there is often an increase in market volatility. Leyla Morgillo, a planner at Madison Financial Planning Group, explains that the first five months of election years historically have lower average returns and higher volatility. However, she emphasizes that this volatility tends to pass after the election results are known. Regardless of the outcome, markets have consistently bounced back and continued their upward trajectory once the uncertainty dissipates.

“This Time is Different” Fallacy

Some individuals may argue that this time is different due to the high stakes involved in the current political climate. However, it is important to approach such claims with skepticism. Renowned investor Sir John Templeton once warned against falling into the trap of believing that “this time is different.” Throughout history, Wall Street has consistently encountered new challenges and uncertainties, yet markets have always persevered.

Revisiting Predictions of Market Crashes

It’s intriguing to see how predictions of market crashes before election results often turn out to be exaggerated. In 2020, Donald Trump predicted a stock market crash if Joe Biden was elected. However, over Biden’s first three years as president, the S&P 500 generated modest but positive total returns averaging 5.3% per year after adjusting for inflation. Contrary to the dire forecasts, the market did not experience a crash.

Similarly, economists warned that a Trump victory in 2016 would tank the markets. However, after an initial dip, the market quickly rebounded and flourished during his term.

The Uncertainty of the Next Term

Speculating on what will happen during the next presidential term is futile. No one can accurately predict how the markets will respond. Therefore, the wise approach for investors is to stick to their long-term investment plans. Reacting impulsively to political events often proves to be misguided. Instead, focusing on fundamental principles and maintaining a disciplined investment strategy enables investors to navigate uncertain times successfully.

In conclusion, while elections may introduce volatility into the markets, long-term investors recognize that the political party in power has limited impact on overall returns. It’s crucial to avoid falling into the “this time is different” mindset and instead rely on historical evidence and a prudent investment strategy.

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