How Will the US Presidential Election Affect the Stock Market?

Just the other day, a close friend of mine was concerned about investing in the US stock market.

You see, the US Presidential election is happening real soon…

And he wanted to know if his US stock portfolio would be affected depending on who wins in the election — Donald Trump or Joe Biden.

While I certainly can’t predict what will happen, we can take some clues from history.

So, sit back and…

let’s see where this takes us.

Past US Presidential Elections and the Stock Market

Studies show that in the year where a Republican is elected, the stock market’s total returns (which includes dividends) are above average while in the following year, returns are below average. The stock market here refers to the S&P 500 index.

On the flip side, when Americans elect a Democrat, the election year returns are below average and the inaugural year returns are above average.

The theory behind this phenomenon hinges on investors’ expectations.

Republicans are usually seen as more business-friendly than the Democrats. When a Republican president is elected, the market gets cheery. However, the market realises that the president can only do so much that the expectations are adjusted to reflect reality. The opposite is also true under a Democrat.

How has the stock market returns been when a Republican is re-elected as opposed to a newly elected Democrat?

It’s a similar trend.

Over the longer term, though, neither party is extremely good nor bad for the stock market.

From 1926 to 2019, the S&P 500 total market return averaged 9.5% each year under Republican presidents and 14.8% under the Democrats. Even though the returns vary widely, they are at least on par or better than the average.

Investing Is About the Long Run

As investors, we should focus on the long-term and not on short-term movements and predictions.

Timing the market is futile so we shouldn’t be dancing in and out of stocks based on politics anyway.

No matter which party rules the day, the stock market has marched higher and higher over the long run.

This should continue in the future due to things such as technological advancements, higher productivity, and inflation, causing higher future free cash flows for surviving companies, which in turn will cause a rise in stock prices.

Your 2020 US Presidential Election Investing Game Plan

“Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.“

 

— Warren Buffett

Now that we know how the market behaves over the long-term, our approach to investing shouldn’t change based on a short-term event such as the 2020 US presidential election.

No matter whether a Republican or Democrat wins the vote of Americans, certain things remain the same.

For instance, people will still use Facebook to connect with their family and friends, search on Google for information, and visit Amazon.com to order household items (and pay through an electronic payment network such as Visa or Mastercard).

All those are listed companies, and their services will still be in demand regardless of the US presidential election outcome.

(Note: The stocks are not a recommendation to buy them but just an example of how we should think about investing in businesses.) 

The stock market could also be volatile, leading up to the election.

But volatility in the stock market is expected. In fact, volatility can present opportunities for us to pick up high-quality companies at lower prices.

So, we should embrace volatility.

As for my friend’s question, I told him to ignore what’s going on in the US political arena and to invest diligently and patiently for the long run.

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Disclaimer: The information provided by Seedly serves as an educational piece and is not intended to be personalised investment advice. ​Readers should always do their own due diligence and consider their financial goals before investing in any stock. The writer may have a vested interest in the companies mentioned.