Updated on Tuesday, November 3, 2020

As votes are being tallied for the 2020 presidential election, many Americans are trying to predict how the stock market will perform the rest of the year.

Since 1928, the S&P 500 has produced negative annual returns in only six of 23 presidential election years. Meanwhile, the Dow Jones Industrial Average has produced negative annual returns in seven of 23 presidential election years.

MagnifyMoney researchers took a deeper dive at how markets have performed historically during presidential election years. We also evaluated how the Democratic and Republican political parties have affected annual returns. Here’s what we learned.

How the S&P 500, Dow have performed during election years

Let’s start with a general look at how the S&P 500 and Dow Jones have performed historically during election years since 1928 (unless otherwise noted).

S&P 500

• The average annual S&P 500 return in presidential election years from 1928 to 2016 was 7.1%. For comparison, the average annual return between 1928 and 2016 — not just accounting for election years — was 7.5%.
• The largest negative annual S&P 500 return (-38.5%) in an election year was in 2008, the first full year of the Great Recession.
• In the past 50 years, the S&P 500 had the highest election-year return (25.8%) in 1980. The market had been incredibly volatile, with S&P 500 trading volume breaking a record that year.

The S&P 500 was up 1.2% year to date as of the end of October 2020.

Dow

• The average annual Dow return in presidential election years from 1928 to 2016 was 6%. For comparison, the average annual return between 1928 and 2016 — not just accounting for election years — was 7.2%.
• The largest negative annual Dow return (-33.8%) in an election year was also in 2008.
• In the past 50 years, the Dow had the highest election-year return (26%) in 1996, starting the run-up to the dot-com bubble.

The Dow was down 7.1% year to date as of the end of October 2020.

Election impact

Elections can have an impact on the stock market as uncertainty around policy direction in the run-up is eliminated, according to Tendayi Kapfidze, LendingTree’s chief economist.

“Since the stock market tends to go up over time, the most likely outcome is that the market will rise, as shown by the historical data,” he said. “For most investors, there is no need to take any action specifically because of election outcomes or election expectations.”

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Political party effect on S&P 500, Dow

We sought to break down things further by looking at political parties, also dating to 1928.

S&P 500

• The average S&P 500 return in an election year when a Republican president was elected was 11.2%, compared with 3.3% when a Democrat was elected.
• When a Democrat held the presidential office and a new Democrat was elected, the average S&P return in those election years was 6.2%.
• When a Democrat held the presidential office and a Republican was elected, the average S&P return in those election years was 8.9%.
• When a Republican held the presidential office and a Democrat was elected, the average S&P return in those election years was -6.6%.
• When a Republican held the presidential office and a new Republican was elected, the average S&P return in those election years (well, just 1988) was 12.4%.

Dow

• The average Dow return in an election year when a Republican president was elected was 10.2%, compared with 2.2% when a Democrat was elected.
• When a Democrat held the presidential office and a new Democrat was elected, the average Dow return in those election years was 6.3%.
• When a Democrat held the presidential office and a Republican was elected, the average Dow return in those election years was 7%.
• When a Republican held the presidential office and a Democrat was elected, the total Dow return in those election years was -8.8%.
• When a Republican held the presidential office and a Republican was elected, the total Dow return in those election years (again, just 1988) was 11.8%.

Letting politics influence your portfolio positioning is dangerous, Kapfidze said.

“The two most recent presidents bear this out,” he said.” Under [President] Obama, many conservative investors were railing on about what they viewed as socialist policy and took actions, which meant they missed out on one of the greatest bull markets in history. Under [President] Trump, many liberal investors concerned about his perceived incompetence and corruption missed out on the continuation of that bull market.”

How different sectors perform during an election year

The financial sector saw the highest rate of S&P 500 returns from 1992 to 2014. Here’s a closer look at the 10 sectors that were examined, via FiGuide:

Gold has generated modest gains in election years. However, the second year of the presidency is when gold performs best, with an average return of 12.8%.

Methodology

LendingTree looked at S&P 500 and Dow Jones Industrial Average returns during election years, along with which political parties were in office. Sources included Macrotrends, Charles Schwab and the Federal Reserve Bank of St. Louis.

Source: https://www.magnifymoney.com/blog/investing/presidential-election-years-study/