Market Returns During an Election Year
Next month, Americans will head to the polls to elect the next president of the United States.
While the outcome is unknown, one thing is for certain: There will be a steady stream of opinions from the media about how the election will impact the stock market. As we explain below, investors would be well‑served to avoid the temptation to make significant changes to a long‑term investment plan based upon these sorts of predictions.
Trying to outguess the market is often a losing game. Current market prices offer an up-to-the-minute snapshot of the aggregate expectations of market participants. This includes expectations about the outcome and impact of elections. While unanticipated future events—surprises relative to those expectations—may trigger price changes in the future, the nature of these surprises cannot be known by investors today. As a result, it is difficult, if not impossible, to systematically benefit from trying to identify mispriced securities. This suggests it is unlikely that investors can gain an edge by attempting to predict what will happen to the stock market after a presidential election.
Predictions about presidential elections and the stock market often focus on which party or candidate will be “better for the market” over the long run. As depicted by the chart below, it is difficult to identify systematic return patterns in election years, but, on average, market returns have been positive both in election years and the subsequent year.
Returns During and After Election Years
S&P 500 Index: 1928-2013
Looking at the data in a different way, the chart below shows the growth of one dollar invested in the S&P 500 Index over nine decades and 15 presidencies (from Coolidge to Obama). This data does not suggest an obvious pattern of long-term stock market performance based upon which party holds the Oval Office.
Growth of a Dollar Invested in the S&P 500
January 1926 – June 2016
The key takeaway here is that over the long run, the market has provided substantial returns regardless of who controlled the executive branch.
Trying to make investment decisions based upon the outcome of presidential elections is unlikely to result in reliable excess returns for investors. At best, any positive outcome based on such a strategy will likely be the result of random luck. At worst, it can lead to costly mistakes. Accordingly, there is a strong case for investors to rely on patience and portfolio structure, rather than trying to outguess the market, in order to pursue investment returns.
Source: Dimensional Fund Advisors LP.
All expressions of opinion are subject to change. This information is intended for educational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products, or services.
Diversification does not eliminate the risk of market loss. Investment risks include loss of principal and fluctuating value. There is no guarantee an investing strategy will be successful.
Past performance is not a guarantee of future results. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio. The S&P data is provided by Standard & Poor’s Index Services Group.
