Investing and Elections: What History Tells Us

Given the quantity of media conversation about how each presidential candidate might impact the market if they were elected, it would be reasonable to think there is a direct relationship between the election and the markets. However, taking a historical perspective challenges the notion that elections meaningfully influence market growth and reveals decades of financial resilience.  

Although popular myths sometimes suggest that one party or the other is consistently ‘better’ for market returns, the historical data does not bear this out. Long-term investors should be wary of claims that any one candidate will “ruin the economy” or “crash the market.” It’s likely that these concerns were voiced about every presidential candidate in modern times, and they were certainly said about Obama, Trump, and Biden. The market rose under all three administrations. 

In fact, the S&P 500 has averaged positive returns under nearly every partisan combination of presidencies and congressional composition – this dynamic chart provides a helpful visual showing growth and economic progress across presidencies.

Looking at the period of 2008 through 2020, which spans the Obama and Trump administrations, the S&P 500 delivered substantial growth to investors. This occurred despite the vast differences between the parties and the increasing polarization of US politics, and despite multiple debt ceiling crises, a US credit rating downgrade, a global financial crisis, and a pandemic. 

Of course, this is not to say that politics and good policy don’t matter. Policies on taxes, tariffs, or antitrust legislation can have important impacts on specific industries, which can then ripple into the broader economy. However, implementing policy change is often an incremental process, and the full economic impacts can have a multi-year lag. Financial markets try to account for these new policies quickly, but it takes time for companies and industries to adjust and adapt. 

While short-term market movements can be influenced by election results or policy expectations, long-term trends are dictated by economic conditions and corporate earnings. In the short term, the market tends to settle once election uncertainty is resolved. If next week’s election is heavily contested with no clear winner emerging, we would not be surprised to see a bout of market volatility. However, when we take the historical view, we see that volatility following past elections or disruptive events quickly faded into mere blips on the long-term chart. 

Throughout US history, presidents generally receive too much credit or blame for economic conditions during their administration. A larger driver of stock performance is the business cycle, which is influenced by a multitude of factors ranging from technological revolutions to globalization. The reason market returns have been historically strong since 2008 is less about Obama, Trump, or Biden and more about a continued technology boom and the low interest rate environment over the majority of that period.  

Similarly, in the 1990s and early 2000s, Bill Clinton’s two presidential terms were perfectly timed with the personal computing and internet boom. Meanwhile, the ensuing “dot-com crash” coincided with the start of George W. Bush’s presidency. It would be a stretch to argue that their presidencies were the primary reason for these booms and busts. 

Once the outcome of an election is known, investors still don’t have total certainty about the impact of potential policy changes, despite expectations about which sectors might thrive under a particular administration. 

For example, if Democrats win, there is an expectation of further development of renewable energy production. On the other hand, if Republicans win, there is an expectation for development and deregulation of fossil fuels. That said, these expectations don’t always translate into market realities. Businesses tied to renewable energy saw their stocks perform better under the Trump administration, while stocks of oil companies and other traditional energy companies have performed better under the Biden administration. This reinforces the importance of diversification since market outcomes aren’t directly correlated with presidential policy priorities. 

For all the focus on the executive branch, monetary policy and Fed decisions have often been a bigger driver of market performance. Both Reagan and Clinton benefited from consistently falling interest rates. George H.W. Bush and George W. Bush were both hurt by Fed tightening, an inverted yield curve, and a recession. Obama benefitted from a historically low-rate environment during his term, and Trump saw tighter interest rate policy during his first two years.[1] The Fed will continue its focus on policy that tames inflation and ensures full employment, regardless of who occupies the Oval Office.

While presidential elections can create short-term stock market volatility, history shows us that markets tend to stabilize and often move positively once the uncertainty is resolved. At North Berkeley, we maintain a long-term perspective and focus on underlying economic trends rather than short-term political changes. Currently, we view the economic landscape as favorable to continued economic growth.   

Every market situation feels unique in the moment, and elements of the current political cycle have indeed been different, but the most reliable investment strategies don’t change dramatically across administrations. At North Berkeley, we lean on history to create context and bring a more grounded perspective to current market challenges. This lens reinforces that the most consistent way to build financial resiliency is to stay invested through full economic cycles, and full political cycles, in a diversified portfolio that participates in broad economic growth. 

Resources: 

[1]  Fed’s interest rate history: The federal funds rate from 1981 to the present.  Bankrate