How do U.S. elections affect stock market performance?

6 minute read

The 2024 presidential race, once anticipated as a showdown between Democratic President Joe Biden and former Republican President Donald Trump, has taken some unexpected turns. With Biden's surprise withdrawal and endorsement of Vice President Kamala Harris as the Democratic nominee, the political landscape has shifted. While no two elections are exactly the same, history shows election outcomes have less influence on long-term market performance than investors may think.

Many investors can feel jittery in election years, concerned how election results might sway their investment portfolios. Some even consider hitting the pause button on investing altogether to avoid uncertainty. Taking a closer look, history shows markets don’t pick political favourites, and over the long-term have performed well under both Democratic and Republican leadership (Figure 1A). And despite changes in governing parties and various political events, markets have maintained their long-term upward trajectory, demonstrating resilience to short-term political shifts (Figure 1B).

While elections can influence fiscal policy and, by extension, financial markets, the broader economy plays a much more significant role in steering market direction. As election day approaches, Canada and the U.S. are showing signs of economic strength:

• Inflation has significantly decreased
• Consumer spending continues to be strong
• Corporate earnings are robust, particularly among large-cap companies
• Economic growth has slowed but still surpassed expectations
• Additional monetary policy easing and rate cuts could further stimulate growth spending

* As of September 1, 2024.

Positioning an investment portfolio based on an expected election outcome is rife with uncertainty. Not only is it challenging to correctly guess who'll be the election winner, it’s even more difficult to gauge the resulting winning investments.

An example from the not-too-distant past

Both of these leading predictions proved to be wrong. And investors who avoided investing in the stock market based on these forecasts missed out on significant gains, underscoring the costly consequences of market timing based on political speculation.

While political headlines may trigger short-term market fluctuations, the long-term performance of stocks is primarily driven by their fundamentals. Over the past 75 years, 18 presidential elections have occurred, with U.S. stocks showing positive performance in 16 of those years (89%). 

During U.S. election years, it's typical for the VIX Index, a measure of stock market volatility, to show an uptick in the months leading up to the election day. While volatility can increase as election day approaches, it has historically subsided immediately afterward - underscoring the importance of maintaining a long-term perspective, rather than acting on short-term political noise when making investment decisions.

With markets thriving under various political administrations and typically overcoming short-term volatility caused by presidential elections, investors should resist the urge to time the market based on political outcomes. Instead, investors are better served by maintaining focus on their long-term financial goals and staying committed to their investment strategy throughout election cycles.

Source: Morningstar. U.S. stocks are represented by the S&P 500. Indices are not managed, and it is not possible to invest directly in an index. Assumes reinvestment of all income and no transaction costs, fees, or taxes.