DeutschThe year 2024 will make history: elections will be held in at least 76 countries, where 4.4 billion people—around 60% of the global population—will be eligible to vote. As the largest election year ever, it is particularly highlighted by the U.S. presidential elections. But how do such political events impact financial markets? Is it wise for investors to adjust their portfolios or exit the market altogether ahead of elections? A look at historical data and trends offers some fascinating insights.
Presidential Elections and Stock Markets: A Historical Perspective
In election years, it’s natural for investors to focus on potential market fluctuations. The question of whether the outcome of the U.S. presidential elections influences stock markets is a common concern. However, history reveals that the long-term performance of markets is not dictated by the party in the White House or the balance of power in Congress.
Long-Term Growth Unaffected by Politics
Since 1926, the S&P 500 Index—a benchmark for the U.S. stock market—has shown consistent growth. Regardless of whether Democrats or Republicans were in power, a hypothetical $1 investment in the S&P 500 over the decades would have grown to over $10,000 by 2023.
The President’s Role: Just One Piece of the Puzzle
While a president’s policies may influence specific industries, they are just one of many factors impacting markets. Technological advancements, global events, interest rate decisions, and commodity prices often play a more significant role than the political party in charge.
The Impact of Congressional Elections
Similarly, the balance of power in the U.S. Congress—whether one party controls both chambers or the Congress is split—has no reliable correlation with market performance. Data from the past 100 years shows that markets generally grew regardless of the political configuration.
Market Volatility During Election Months? No Need to Panic
A common concern among investors is the fear of market turbulence immediately before or after an election. Yet historical data indicates that there is no significant difference between returns in election months and those in non-election months. Even during periods of heightened uncertainty, markets remained largely stable.
Monthly Returns Show No Clear Patterns
Analysis of monthly S&P 500 returns from 1926 to 2023 reveals no definitive trend linked to election months. Whether a Democrat or Republican won the presidency had no reliable impact on the direction or magnitude of market movements during these months.
What Should Investors Do?
While it may seem intuitive to factor upcoming elections into investment decisions, the data suggests otherwise. Not only does adjusting a portfolio based on election outcomes fail to promise better returns, but it also introduces the risk of costly mistakes. Exiting the market abruptly can mean missing out on valuable gains. Instead, having a long-term plan and sticking to it is a proven strategy.
A Calming Perspective
David Booth, founder of Dimensional, puts it aptly: “You vote with ballots, not with your savings.” Markets ultimately reflect the economy, not politics. Companies will continue to innovate and grow over time, regardless of who occupies the White House.
Conclusion: Keep a Cool Head
While the election year 2024 may be unprecedented in scope, the principles of successful investing remain unchanged. Political events are only a small piece of the puzzle in determining market movements. Investors should focus on their long-term goals and avoid reacting to short-term political developments. As history shows, the market doesn’t follow party lines—it follows the drive for innovation and growth.