By now you may have heard this is an election year. Actually, by now you are probably sick of hearing that it’s an election year! And still almost two months to go.
You may be wondering what happens to the stock market in an election year. Does it generally go up or down? Does it matter which political party wins the presidency?
Well, we’ve actually got a little history on these questions, over 150 years’ worth to be specific. And the answers may surprise you.
Vanguard economist Adam Schickling analyzed market returns going back to 1860 with an eye toward differences between Republican and Democrat administrations. During this time frame, Republicans controlled the White House for 94 periods and Democrats had control for 65 periods.
The portfolio constructed by Schickling averaged an annual return of 8.2 percent under Republicans. The same portfolio under Democrat years averaged an 8.4 percent return. However, as the nerds (statisticians) who keep track of this sort of stuff say, that’s not enough difference to be “statistically significant.” In other words, the difference in returns could just be due to random chance as opposed to, for example, better management of the economy by Democrats.
What about returns in the actual year of a presidential election, like this one? It turns out that during a presidential election year, returns average 8.9 percent. There are 40 of these such periods in the Vanguard study. However, in non-election years (119 periods), returns average 8 percent. While this is a larger difference than the Democrats vs. Republicans analysis, Schlicking says it is still not statistically significant. Again, the difference is probably due to chance.
Schlicking also found no difference in market volatility in an election year. Kind of hard to believe after what we have experienced this year. But bear in mind we also have a COVID-19 pandemic to deal with in addition to an election.
The takeaway here: The world is not going to end if your candidate loses, despite such warnings from the several billion dollars of commercials we have to suffer through.
So, don’t let the fact that it’s an election year affect your long-term game plan for saving and investing. Stay the course despite all the political noise!
Dr. David Ashby is a Certified Financial Planner and the retired Peoples Bank Professor of Finance at Southern Arkansas University. He holds degrees in accounting and business administration and a doctorate in finance from Louisiana Tech.