A Review of Financial Returns and US Presidential Election Years

Financial markets are dynamic and reflect not just economic conditions but also the political climate. Related to political climate, the impact of US presidential elections on financial markets has been heavily analyzed. Every four years, as the US gears up for its presidential election, investors and analysts closely watch the unfolding political drama, gauging its potential effects on the economy, the broad market, as well as on various economic sectors.

Understanding the relationship between presidential elections and market behavior is not just about observing trends, it's about decoding the interplay of investor psychology, policy expectations, and economic forecasts. In this review we delve into past election years, uncovering patterns and trends that have shaped financial markets. From the market’s reaction to election uncertainties, to sector-specific impacts, this review offers a comprehensive view of how presidential elections have historically influenced and may continue to influence the financial landscape.

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Long-Term Market Trends: Beyond Presidential Parties

In the broader context of long-term economic trends, it is evident that despite the inevitable short-term fluctuations and political changes associated with presidential elections, the US economy and stock market have demonstrated remarkable resilience and growth over the years. This upward trend in key economic indicators like the S&P 500 index level and nominal GDP underscores the fundamental strength and stability of the US economy, transcending partisan politics.

This emphasizes the importance of maintaining a long-term perspective, especially during periods of election-driven market volatility. The overall growth observed across different administrations, irrespective of the ruling party, highlights that the continuous economic progress of the US, and the time tested American democratic system, often overshadows the transient effects of political shifts.

The S&P 500 Displays a Non-Partisan Perspective

In examining the S&P 500's performance throughout US presidential election cycles, historical results indicate the market's non-partisan nature and resilience. Historically, the S&P 500 has shown average positive returns in every year of the election cycle, with the highest averages typically seen in the third year (e.g., 2023). This third-year bump is often attributed to pre-election policy adjustments including economic stimulus measures that have a positive spillover effect on financial markets.

Notably, barring open elections where no incumbent is running, the S&P 500 has not experienced a decline during election years since 1952, pointing to market stability despite these politically charged times.

A closer look at the market's behavior under different partisan combinations since 1933 reveals that it has averaged positive returns almost universally, with the highest returns frequently occurring under divided government scenarios. These patterns also highlight the market's resilience irrespective of political shifts, indicating a detachment from the passing effects of electoral politics.

Political Uncertainty and Volatility During Election Cycles

Looking more into the market dynamics during US presidential election cycles, the relationship between political uncertainty and market volatility is more nuanced. Political uncertainty, as measured by the Economic Policy Uncertainty (EPU) Index, tends to increase throughout presidential election years, with a notable peak in the fourth quarter.

Despite this escalation in uncertainty, stock market performance often defies these pressures, with the S&P 500 tending to produce higher returns in the 1-, 3-, 6-, and 12-months following spikes in policy uncertainty. While uncertainty tends to be associated with the concept of higher risk and may hold a negative connotation in investors’ minds, this pattern highlights the market's ability to produce positive returns even during periods of heightened uncertainty surrounding the ambiguity of political outcomes.

Moreover, as displayed earlier, S&P 500 returns during election years underscores this resilience, showing that the S&P 500 has not experienced a decline in a presidential re-election year since 1952, despite the inherent economic uncertainty in these years.

Contrary to common assumptions, market volatility, particularly around presidential elections, does not always align with the patterns of political uncertainty. Data dating back to 1964 reveals that the volatility of the S&P 500, as measured by the VIX, is lower in the 100 days before and after a presidential election, compared to the long-term average. This finding challenges the notion that presidential elections lead to increased market volatility. In fact, for presidential elections from 1984 to 2020, the S&P 500's annualized volatility was observed to be 16.5% in the 100 days before an election and 15.9% in the 100 days following, both figures being lower than the overall period's volatility of 17.9%. These insights suggest a market that is more stable and less prone to election-driven volatility than might be expected.

The Impact of Recessions on Presidential Elections and Markets

The economy and financial markets are intricately linked, and the status of the economy has also been correlated with presidential election outcomes. The relationship between economic performance and politics is highlighted by the historical impact of recessions on presidential re-elections. Significantly, the occurrence of a recession has historically been a decisive factor in determining the political fate of incumbent presidents, with those facing a recession within two years of their re-election bid typically losing, while those avoiding economic downturns within two years of their term usually winning re-election.

However, also of note, there has never been a recession in the third year of a president's term, though there have been several instances of recessions occurring in presidential election years.

These election-year recessions often trigger urgent economic containment efforts, with varying degrees of success, as seen in past election cycles. Looking ahead to 2024, the economic landscape presents a mixed picture, with the probability of a recession being a much-debated topic through most of 2023. The probability of a US recession within the next twelve months continues to be elevated, but peaks at the end of 2023 and begins to decline at the start of the new year. This heightened uncertainty surrounding the economy casts a nuanced light on the upcoming presidential election, and will likely be a focus of the Biden administration as they attempt to navigate an expected bid for re-election.

Sector Performance in Presidential Election Years

Zooming out from a broad market perspective and instead examining the interplay between presidential election cycles and market sectors, certain patterns emerge. This should be caveated that the results have a degree of variability influenced by the unique issues and candidate positions of each election. Notably, the Energy and Communications sectors have historically shown a track record of outperforming the S&P 500 in presidential election years.

However, for any given election cycle, the impact of specific election issues can lead to divergent outcomes within the same sector, resulting in a mix of subindustry winners and losers. This phenomenon particularly underscores the impact of policy debates and election themes on different market segments.

On the other end of the spectrum, the Healthcare sector often finds itself as the underperformer in these periods, having underperformed the S&P 500 nine times and having been the worst-performing sector in four of the past twelve presidential election years. This trend is illustrated through historical performance data, contrasting starkly with sectors like Financials and Energy, which lead in average returns, especially in the fourth year of the presidential cycle. However, sectors like Communication Services, despite occasional outperformance, average relatively lower returns due to years of significant underperformance. This highlights the sector's susceptibility to the varying political and economic climates of election years.

Moreover, the analysis of sector performance in relation to election outcomes reveals an interesting lack of consistent partisan patterns. While certain sectors like Consumer Discretionary and Energy have shown tendencies to outperform ahead of Democratic and Republican wins respectively, these trends do not hold consistently in the post-election period. Notably, the Materials sector exhibits a significant bifurcation in outcomes, often outperforming following a Republican win and underperforming after a Democratic victory. These insights demonstrate that while there are observable trends in sector performance during presidential election years, they are not strictly partisan and are influenced by an array of factors, including the specific economic and policy context of each election cycle.

Policy change takes time, and the difficulty to enact change depends, in part, on how deep the government divide is. Once policy change is enacted, there is an inherent lag in impact. Further, big legislation often comes in phases, which can further draw out the time to impact. One recent example of this can be seen with the bipartisan infrastructure bill during the Biden administration. The bill was passed in November 2021 and is spread out over five years with many planned projects taking years to get started, let alone completed.

Navigating Financial Markets in US Presidential Election Years

The relationship between presidential election cycles, the economy, and financial markets is complex. This review has examined various aspects of these relationships, offering insights into how the interplay of politics and economics shapes market behavior. From historical broad market trends to the performance of different market sectors, the narrative has underscored a consistent pattern: while presidential elections introduce elements of uncertainty and volatility, they also suggest opportunities that investors and market observers can navigate.

Key takeaways include the resilience of financial markets, especially the S&P 500, which has shown positive average returns in every US presidential election year and has not declined in a presidential re-election year since 1952. This trend holds true despite fluctuations in policy uncertainty and market volatility. However, the analysis also reveals that recessions play a pivotal role in determining presidential re-elections, with economic performance being a critical factor in shaping political outcomes and a primary focus as we enter the election year in 2024.

Sector performance during election years is more nuanced than broad market performance and requires more focus on the specific election issues highlighted in presidential debates. While sectors like Energy and Communication Services have generally outperformed, Healthcare has often lagged, illustrating the sector-specific impacts of election-year dynamics. However, the absence of clear partisan patterns in the sector and broad market performance, especially in the months leading up to and following elections, highlights the non-partisan nature of market dynamics.

As we look towards future election cycles, including the upcoming 2024 presidential election, these insights offer a lens to view potential market trends and economic indicators. Understanding these patterns and their implications can equip investors with the tools to make informed decisions and strategies in the face of election-related uncertainties. By recognizing these patterns and appreciating the underlying stability and resilience of the markets, investors can better navigate election-related economic and political developments.


The information in this report was prepared by Fire Capital Management. Any views, ideas or forecasts expressed in this report are solely the opinion of Fire Capital Management, unless specifically stated otherwise. The information, data, and statements of fact as of the date of this report are for general purposes only and are believed to be accurate from reliable sources, but no representation or guarantee is made as to their completeness or accuracy. Market conditions can change very quickly. Fire Capital Management reserves the right to alter opinions and/or forecasts as of the date of this report without notice.

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Kelsey Syvrud, PhD

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