With Election Day rapidly approaching, everyone seems to have their opinions about who will be a better President for the economy. However, what does the historical data say?
The research suggests that it doesn’t really matter which party takes control. Investors seem to be more concerned about avoiding policy changes that could impact business profits.
The Dow Jones Industrial Average
The Dow Jones Industrial Average, more commonly known as the Dow, is a stock market index that tracks 30 of the largest companies in the United States. It is one of the oldest stock indexes in the world and is widely viewed as a barometer for the overall health of the stock market. The Dow is maintained by S&P Dow Jones Indices, a joint venture that is majority owned by financial information and analytics company S&P Global.
The index was created in 1896 by Charles Dow and his business partner Edward Jones. It was designed as a way to track the performance of major industries in the economy. Today, the Dow includes stocks from all sectors of the economy except for transportation and utilities (which are tracked by separate indexes). The Dow is price-weighted, meaning that changes in the share prices of the 30 companies make up the most of the index’s value.
Conventional wisdom suggests that the winner of a presidential election should have a significant impact on the stock market, but this has not been the case in recent history. In fact, since 1990, a Democratic win has actually been slightly better for the stock market than a Republican victory. The difference is small, however, and it is hard to draw any definitive conclusions from the data.
In general, the Dow tends to rise modestly in election years, but it is not always a good indicator of future stock market performance. In the past, it has risen on average by 2.4% in the first year of a president’s term, 4.2% in the second year, and 10.4% in the third year. However, it has also declined by an average of 6% in those same years.
The upcoming election is likely to have a significant impact on the markets, but it is difficult to predict what the exact effect will be. Many different factors can affect the market, including political uncertainty and interest rates. It is also possible that certain sectors will rise or fall based on their exposure to specific policies. Healthcare, energy, and technology are some of the most sensitive sectors to political changes.
The S&P 500
There has been a long-standing debate about the correlation between politics and stocks. The election of a president typically marks an opportunity for investors to assess the impact that the new government may have on the market. However, the results of various studies have been mixed. Some studies have found that the winner of a presidential election does not significantly influence stock market performance. Other studies have found that the type of political party that wins a presidential election can influence the market.
Conventional wisdom suggests that Republicans are more supportive of businesses, and therefore the economy, than Democrats, so they should be better for the stocks in your portfolio. However, this has not proved to be the case in recent decades. In fact, since 1990, Democratic presidencies have been the best for stocks, whereas Republican presidencies have tended to underperform.
Investor sentiment also plays a role in stock market performance. Studies by Colon-De-Armas and colleagues [12] have examined the effect of shifts in investor sentiment around US elections on stock prices using secondary data. They used the discounts that closed-end funds offer on their shares to gauge investor sentiment. They found that discounts begin to decrease from two weeks before an election and persist until a week after, suggesting that investors become more optimistic around the time of an election.
Other studies have found that the size of a company’s market capitalization has an impact on the performance of its stocks in the Dow Jones. This is because larger companies are disproportionately represented in the Dow, while smaller companies are not. Additionally, the way in which companies are weighted in the Dow can also affect their relative performance. Smaller companies are more likely to be influenced by changes in the price of their stocks, while larger companies are less so.
A final factor in the influence of elections on the S&P 500 is how much control each political party has over the executive and legislative branches of the federal government. Waggle and Agrrawal [14] find that years after an election in which a single political party holds both the presidency and both houses of Congress have seen larger average stock gains than other elections.
The Nasdaq
As an investor, you might be tempted to try and predict what the impact of this year’s election will be on the stock market. But getting too hung up on what might happen under all the different permutations and combinations of elections might actually hurt your returns. Instead, focus on what you can control, like how diversified your portfolio is to help cushion the volatility of market downturns.
The big question investors are focused on is what kind of policies the new president will enact, and how they may affect the economy. For example, if the economy has been struggling, the markets may favor a candidate who intends to roll back regulations across industries and bring less government involvement into the economy. Alternatively, if the economy has been performing well, the markets may favor a candidate who plans on implementing tax cuts and lower inflationary measures to increase consumer spending.
A review of market data going back about 90 years shows that the stock market tends to slow down and show a weaker performance during election years. On average, stocks show gains of less than 6% during election years, which is below their typical gain of 8.5% for any given 12-month period. The same is true for bond markets, which typically show a lower return in election years than at other times.
Another important consideration is the level of control one party will have in both branches of the federal government. In other words, who controls the Senate and House of Representatives is equally as important to investors as who holds the White House. If there is a split between the two parties, investors are generally neutral as to who wins the presidency. However, if one party has control of all three branches of the federal government, investors are generally more optimistic about the outlook for the economy and the stock market than when power is shared between the two parties.
It also appears that whether the winning presidential candidate is a Democrat or Republican has a negligible effect on stock market returns. A Democratic victory emits a negative stock market reaction while a Republican victory is accompanied by mixed results.
The Russell 2000
The Russell 2000 is a small-cap index that tracks the performance of smaller companies. The index has a higher risk and volatility than the Dow Jones, S&P 500 and Nasdaq. It is more focused on fast-growing, high-growth firms that are still early in their development cycle and can be vulnerable to political events and news.
In general, the Russell 2000 has a lower correlation with presidential elections than other indices. However, it is important to note that the relationship is cyclical. In other words, the index tends to rise in the lead-up to elections and then drop as voters become anxious about the future of public policies. This trend is often seen in the second year of a president’s term, when investors are anticipating new policy changes.
There is no way to know exactly how markets will respond this November, as there are many factors weighing on the economy and the market. However, it is worth noting that the current political climate has created a lot of uncertainty and volatility for investors. This may have been partially responsible for the recent correction in stocks.
Historically, the biggest gains in the stock market have occurred when the president and Congress are controlled by the same party. This is because investors assume that the ruling party will be more supportive of business and that it will be easier to pass legislation that will benefit the economy. In fact, a Democratic win has actually been worse for the market than a Republican one, with returns averaging 5% less.
The stock market reaction varies by industry, with mining and manufacturing industries showing a greater negative response to the election results than construction or financial industries. Overall, the Russell 2000 has had a positive response to election years since 1980. However, the effect is not consistent and has been impacted by economic events in each of those years. As a result, it is important to keep your expectations in check and avoid overreacting to every political event. As always, it is a good idea to remain well-diversified with your investments and to monitor market movements closely.
Conclusion
Presidential elections can have an impact on the Dow Jones Industrial Average (DJIA), as changes in government policies and economic priorities can affect the stock market. However, the impact of elections on the DJIA is difficult to predict and can depend on a wide range of factors.
Historically, the stock market has tended to perform well in the months leading up to a presidential election, regardless of the political party of the candidates. This is often attributed to the anticipation of government policies that may stimulate economic growth, such as tax cuts or infrastructure spending.
However, the outcome of the election itself can also impact the stock market. A surprise result or a perceived shift in economic policies can cause volatility in the market, with sharp movements up or down.
In the long term, the impact of presidential elections on the DJIA is usually relatively small compared to other factors, such as economic conditions and global events.
Investors should be cautious about making investment decisions based solely on the outcome of a presidential election and should consider a range of factors when making investment decisions.
FAQs:
Q: Can presidential elections impact the Dow Jones Industrial Average?
A: Yes, presidential elections can impact the DJIA, as changes in government policies and economic priorities can affect the stock market. However, the impact is difficult to predict and can depend on a wide range of factors.
Q: How has the stock market performed during past presidential elections?
A: Historically, the stock market has tended to perform well in the months leading up to a presidential election, regardless of the political party of the candidates.
Q: Should investors make investment decisions based solely on the outcome of a presidential election?
A: No, investors should be cautious about making investment decisions based solely on the outcome of a presidential election and should consider a range of factors when making investment decisions.
Q: What are some other factors that can impact the DJIA?
A: Other factors that can impact the DJIA include economic conditions, global events, company-specific news and developments, and changes in interest rates or government policies.
