The Impact of U.S. Presidential Elections on the Market

Key Takeaways

Historical data shows no significant market impact from single-party control in U.S. elections.

Interest rates and inflation trends are the primary drivers of market performance.

Divided government scenarios can lead to above-average market returns.

For the Stock Market, Elections Can Come and Go

As November's presidential election approaches, it’s hard to escape the barrage of news stories about Trump and Biden.

At MyWallSt, we typically steer clear of discussing politics. However, we find it pertinent to explore the impact of elections on the U.S. stock market, given the significant importance many people place on them. Interestingly, elections might not be as crucial to market movements as people think.

Presidential Influence on the Market

Ben Carlson, in an article published four years ago, stated, “When it comes to the markets or economy, presidents get far too much blame when things go poorly and far too much credit when things go well.” Essentially, one person cannot single-handedly control the $30 trillion U.S. stock market or the $20 trillion U.S. economy. Carlson later questioned whether the stock market cares about anything anymore, concluding that interest rates are the primary driver of market movements.

When considering macro events like presidential elections, interest rates remain the dominant factor influencing the stock market. Despite this, endless analysis of election outcomes and their impact on market performance continues.

Analyzing Historical Data

To delve deeper, U.S. Bank investment strategists reviewed market data dating back to 1948, analyzing 76 years of data. They compared three-month returns following each election outcome with the average three-month returns during the entire analysis period. They used a T-test to determine the statistical significance of the relationship between political control and market performance.

The T-test assessed whether the political composition of the White House and Congress had a measurable effect on the average three-month S&P 500 returns during the control period. This analysis looked at specific periods when parties took control of different branches of government, rather than just starting from election dates.

Key Findings

Contrary to conventional wisdom, a sweep of the presidency and Congress by either Republicans or Democrats does not significantly impact overall market performance. However, the data revealed three divided government outcomes with a significant relationship to market performance:

Democratic President and Republican Congress: This scenario historically results in above-average market returns.
Democratic President and Split Congress: This also tends to produce above-average returns.
Republican President and Democratic Congress: This scenario results in positive returns, albeit slightly below the long-term average.

Currently, the U.S. Congress is divided, with Democrats holding a slim majority in the Senate and Republicans controlling the House. However, it’s crucial to note that inflation trends have a more consistent and predictable relationship with market returns than election outcomes.

Beyond Election Outcomes

Rising economic growth and falling inflation are key drivers for above-average long-term market returns. In the lead-up to an election, various factors are scrutinized, such as individual and corporate tax policies, spending priorities like infrastructure and defense, Medicare and Medicaid, tariffs on foreign goods, and responses to geopolitical conflicts.

Predicting the market’s reaction to unforeseen events is nearly impossible, underscoring the complexity of these analyses. Despite delving into extensive data, it becomes evident that following election-related market predictions may not be worthwhile.

Conclusion

While presidential elections generate significant interest and speculation, their impact on the stock market is often overstated. Historical data and statistical analysis suggest that other factors, particularly interest rates and inflation trends, play a more crucial role in driving market performance. Therefore, investors should focus more on these macroeconomic factors rather than the outcomes of presidential elections.

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As of May 2024

The Impact of U.S. Presidential Elections on the Stock Market

Key Takeaways