investing

How Elections Affect the Stock Market

Once election day is over, stocks are likely to jump -- regardless of which party wins.

Will a Republican victory in the upcoming congressional elections help the stock market? Or will the market fare better if Democrats hold on to Congress and continue their much-criticized efforts to fix the struggling economy?

Guess what? It probably won’t matter -- at least not to investors. The stock market simply wants election day to be behind us: Stocks have rallied after every mid-term election since 1942.

Stocks surge, on average, by a whopping 18.3% in the 200 trading days after mid-term elections, according to the Leuthold Group, a Minneapolis-based investment-research firm. Standard & Poor’s 500-stock index chalked up its biggest 200-day gain, 30.5%, in 1942, as the tide began to turn in World War II. The puniest gain, 3.9%, came in 1946, as investors fretted that the economy would sink into another depression.

In the 11 mid-term elections between 1942 and 1982, control of one or both houses of Congress flipped just twice. But in more- recent elections, a majority of Americans have expressed their unhappiness with the party in power. Voters have ousted the party in power in Congress four times in the past six elections. The polls show that the pattern likely will be repeated in this year’s election, with the GOP regaining control of the next House of Representatives.

The market has essentially been neutral about such changes. In the elections in which control of Congress didn’t switch, the S&P 500 rose an average of 17.9% over the 200 trading sessions after election day. That compares with an 18.3% gain for all mid-term elections -- a difference of less than one half of one percentage point.

Because investors hate uncertainty, what matters most is simply getting the election over with. Indeed, since 1942, the S&P has tended to lag in the 200 days before mid-term elections. On average, stocks have gained 2.6% during that period. Starting in early October, however, stocks have tended to stabilize and then rise -- probably because Wall Street starts to anticipate how the election will turn out. "Changes in congressional majority power in mid-term elections appear to have little to do with causing the strong performance of equities following the election," Leuthold’s Eric Bjorgen says. "It doesn’t matter if power shifts to the other party or not. It’s knowing what’s going to happen, knowing how policy will be formulated. It’s a clearing up of the clouds of uncertainty."

The presidential cycle

The "presidential cycle" historically has also been a good predictor of stock performance. The thinking is that presidents try to make tough economic decisions during the first two years of their tenure, and that often leads to lousy stock-market performance. Then, as presidential elections near, the incumbents do everything possible to ignite the economy so that they and their party will hold the White House for another term.

Since 1940, the S&P has returned a cumulative 9.3%, on average, in the first two years of presidential terms -- slightly more than a third of the 25% cumulative return in the second two years.

But the presidential-cycle indicator has fallen on its face of late. Through October 11, the S&P 500 has risen 6.2% so far in 2010, the second year of President Obama’s term. It surged 26% last year.

President George W. Bush couldn’t make it work, either. After gaining ground in the first two years after his re-election in 2004, the market rose a mere 5% in 2007, then plunged 37% in 2008.

The bottom line: Even presidents can’t control the economy, and forecasting the market based on the presidential election cycle doesn’t look as reliable as it once did.

Although the mid-term election-rally effect appears to be holding fast, you shouldn’t bank on that either. Markets, alas, often find a way to upset our preconceived notions. 


Steven T. Goldberg (bio) is an investment adviser.

Most Popular

Where's My Stimulus Check? Use the IRS's "Get My Payment" Portal to Get an Answer
Coronavirus and Your Money

Where's My Stimulus Check? Use the IRS's "Get My Payment" Portal to Get an Answer

The IRS has an online tool that lets you track the status of your second stimulus check.
January 18, 2021
Don’t Have a Pension? The SECURE Act Could Help
retirement planning

Don’t Have a Pension? The SECURE Act Could Help

If you’re worried about retirement, the SECURE Act has a lot to offer. It has several provisions to allow people to save more, for more years — and it…
January 22, 2021
When Could We Get a Third Stimulus Check?
Coronavirus and Your Money

When Could We Get a Third Stimulus Check?

President Biden and others in Congress are pushing for a third-round of stimulus checks, but it might be a while before we get them.
January 20, 2021

Recommended

Bonds: 10 Things You Need to Know
Investing for Income

Bonds: 10 Things You Need to Know

Bonds can be more complex than stocks, but it's not hard to become a knowledgeable fixed-income investor.
July 22, 2020
Kiplinger’s Mutual Fund Rankings, 2021
Kip 25

Kiplinger’s Mutual Fund Rankings, 2021

In a volatile year, the best portfolios had plenty of opportunity to shine.
January 23, 2021
Is the Stock Market Open on Inauguration Day 2021?
Markets

Is the Stock Market Open on Inauguration Day 2021?

The federal government will enjoy an off day on Inauguration Day, but the stock and bond markets alike will conduct business as usual.
January 19, 2021
The 11 Best Vanguard Funds for 2021
mutual funds

The 11 Best Vanguard Funds for 2021

It'd be easy to put together a full 2021 gameplan using nothing but a mix of the best Vanguard funds. Here are 11 that stand out for the year to come.
January 7, 2021