Key Questions: How do US Stocks Perform During Presidential Elections?
Observations can be drawn from examining historical performance data during election years.
Clients are increasingly asking us to provide historical context for the performance of the US stock market during election years.
Using price return data for the S&P 500 Index from January 1928 to December 2019, we found that the index recorded an arithmetic average of 7.7% annually during this 92-year period. When we isolate the presidential election years (there were 23), the average drops to 7.1%. In contrast, non-election years averaged 7.9%.
However, the performance in non-election years was very uneven. The years prior to the presidential election delivered an average return of 13.5%, while the averages for the year immediately following the presidential election and the midterm year posted rather middling results of 5.8% and 4.3%, respectively. This means that, on average, the presidential election year is the second-best year out of the four-year election cycle, and the third year is the best.
A similar pattern is seen when we review annual median returns. The entire sample had a median return of 10.5%, while the presidential election years had a median of 9.5% and non-election years recorded a median of 10.8%.
Interestingly, January price performance has historically done a great job of bifurcating election year returns into two buckets: one bucket that generates the best performance of any average period in the data set (Presidential Election Year + January Up, +16.6%), with a batting average of 11 for 11, and one that generates the third worst (Presidential Election Year + January Down, -1.6%).
Given this, if the market finishes the month of January higher, then the probability is high that equities will have a good year. Based on our sample, we also believe that — if history repeats itself — it is safe to conclude that the market could struggle mightily this year if January finishes lower.
Digging deeper, we found that one major reason why election years have such radically different performance profiles is the higher-than-normal occurrence of recessions during and around election years. There were 14 recessions during our sample period of 92 years. However, six of those recessions occurred during and around election years.
Hypothetically speaking, if episodes of recessions were evenly distributed, one would expect only three and one-half recessions to occur during election years, not six. The arithmetic average return during the six recessions that coincided with presidential elections was -6.9%, a record of poor performance that was exacerbated by the Global Financial Crisis in 2008 when the S&P 500 declined by -38.5%.
One final observation drawn from our analysis is that a recession during a presidential election year almost always guarantees a loss for the incumbent’s party. In our sample period, the only time an incumbent won re-election during a recession year was in 1948 when President Harry Truman narrowly defeated Republican Governor Thomas Dewey. It was the most competitive election since 1916 and arguably one of the greatest election upsets in American history.
Given how the first few days of 2020 have begun, a lot will likely transpire between now and election day. Accordingly, investors should remain diversified and we will continue to closely monitor developments.
For more information, please contact your Key Private Bank Advisor.