A Tale Of Two Returns

Do Election Returns Foretell Market Returns?

By David Feinman

A previous version of this article was published on September 12, 2020.

It is hard to believe that four years have gone by since the last US presidential election. Yet here we are, amid another bruising partisan competition, made more uncertain by President Biden’s withdrawal from the race and subsequent endorsement of Vice President Harris. 

On November 5th, U.S. voters will decide one of the most contentious and divisive political contests in the nation’s history. Issues of profound significance to all Americans, and perhaps even the future of democracy itself, may hang in the balance. But can the outcome of this critically important election tell us anything about what to expect in terms of future investment performance? The specific issues being decided are different, but investors tend to ponder the same questions in every election cycle: Who will win and how will markets respond? The answers never change. No one can know the outcome of a fair election in advance, nor can the reaction of the capital markets be predicted with confidence.

Speculation about how the election might affect the markets is rampant, but unfortunately, there is no tool for predicting with certainty either the election outcome or its financial implications. One need only recall how in 2016 the consensus predicted first Trump’s defeat, and then a market crash after his upset win, to appreciate the folly of building a portfolio based on electoral polls. An investor guided by those forecasts failed twice. Conversely, investors who were not thrown off course from a disciplined long-term strategy were rewarded by a bull market.

Investor sentiment often follows the same fault lines as political identification. Studies have shown that investors’ optimism is influenced by the alignment of their personal values with the political party in power.[i] But historically, U.S. capital markets have been largely indifferent to which party occupies the White House or holds a congressional majority. As shown below, long-term investors have been rewarded under both Democratic and Republican regimes.

It is easy to be distracted by month-to-month or even one-year returns, but what should matter most for long-term investors is the growth of wealth over time. The chart below graphs the hypothetical growth of $1 invested in the S&P 500 Index in January 1926; the horizontal axis shows party control of Congress during the period. Both Democratic and Republican majorities are linked to periods of robust growth as well as demoralizing decline. Yet there is no clear pattern of higher returns when either party held the majority, or during periods of bi-lateral control. Markets generated positive returns over the long run regardless of which party held power.

Election outcomes have not foretold long-term market returns. While markets may be politically agnostic, their fairness and efficiency rest firmly on the shoulders of a pluralistic democracy that is held to the rule of law. Put simply, markets have rewarded investors not for whom they voted, but because they voted. Every American has a sacred duty to vote. The health of the nation’s democracy depends on it. If democracy is protected, then free and fair markets will endure.

[1] https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1509168#

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