US Markets and Elections – It may matter less than you think.

With the primary season among us, attention is being increasingly paid to the 2024 Presidential election.  Like most historical Presidential elections, emotions and fears of potential political outcomes tend to run high and increase as we approach November.  Political views aside, it is our job to understand the political environment, both historic and current, and to do our best to have a fundamental grasp on how politics and outcomes affect the markets.  Surprisingly, it may matter a lot less than you think.  With this in mind, today we are sharing some historical views of elections and their impacts on markets.


Long-Term Perspectives

Fundamental financial planning focuses on three main liquidity concerns in consideration of investment allocation: 1) liquidity for near-term financial expense surprises; 2) liquidity for near-term needs; and 3) liquidity for the long term.  Our foundation for investing is to take care of the near-term needs/surprises with low-risk assets first and then to invest for the long-term with risk assets.  Said differently, money invested in marketable securities (the stock market) should maintain a long-term perspective when considering the economy/markets/elections.  


Average Annual Stock Market Performance by Political Party

When we analyze stock market performance by political party, many may be surprised to see that the performance is relatively the same under the leadership of either political party during the full four-year term.  While some may be inclined to modify their investment holdings if the “XYZ” party wins, as a long-term investor this may result in detrimental performance.  The following two charts illustrate the average four-year annual returns during Republican/Democratic presidencies and the cumulative growth over different historical presidential terms.

*Source: Fidelity Investments. Market performance is represented by monthly data since 1789 (mix of S&P 500, Dow Jones Industrial Average, and Cowles Commission). Source: Fidelity Investments. Past performance is no guarantee of future results. Indices are unmanaged. It is not possible to invest directly in an index.

Source: Capital Group3


Short-Term Differences, Long-Term Similarities 

Furthermore, in 2020, Fidelity completed an exhaustive study2 on the average growth of the US market over a period going back to 1789.  As depicted below, as one would expect, the average market growth continues to improve each year that the President is in office.  The data in blue is some of the most interesting data I have seen about political leadership makeup and markets.  What is interesting to note is that any short-term momentum (dark blue), or lack thereof, is largely lost by the time the four-year cycle is complete (light blue).  This is recognized in nearly all political environments across history.  While the sample size is not large, this data can help add perspective and clarity to our investment decision-making.

It All Comes Back to Fundamentals

In conclusion, it all comes back to fundamentals.  If we take a long-term perspective, we strongly believe that the future is bright and America will continue to innovate, grow, and improve.  Market growth will largely be based on the fundamentals of the underlying companies and corporate profits.  The corporate profits will likely continue to have a much larger impact on the growth/decline of the underlying companies, than a political party/President.

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