How Will the U.S. Presidential Election Impact S&P 500 Returns?

S&P 500 Returns in the Year of U.S. Presidential Elections Since 1928

The U.S. presidential election will take place on Tuesday, 5 November 2024. This year’s presidential race has been more dramatic than ever. Leaving aside whether Trump or Harris will win this election, I am curious about how the U.S. stock market (with a focus on the S&P 500, as usual) has performed in past election years. Below is a table showing the total returns of the S&P 500 (the sum of index gains and dividend yields) for years with U.S. presidential elections.

(Note: Some figures may seem unusual. For example, Ford's attempt in 1976. Nixon was president before Ford. Ford wasn't a president, so how could he attempt reelection? Nixon resigned in 1974 due to the Watergate scandal, and Ford, who was vice president, became president. Ford then attempted reelection in the next election.)

Analysis of S&P 500 Returns in Presidential Election Years

I first noticed the drastic drops in 1932, 1940, 2000, and 2008. Particularly, the -37.0% plunge in 2008 is frightening. However, these drops were due to extraordinary events, not the presidential elections. For instance, the Great Depression in 1932, the onset of World War II in 1940, the collapse of the dot-com bubble in 2000, and the global financial crisis in 2008. These exceptional events are included in the average calculations. I think that it wouldn’t make sense to calculate averages only from years with good performance.

As of September 6, 2024, the S&P 500’s total return is 14.5%. This is still very good even after the 4.2% drop in the first week of September. (Investors who frequently buy and sell are more likely to underperform this rate of return than to exceed it. This suggests that a buy-and-hold strategy, where one purchases quality stocks or index ETF during market corrections and reviews performance only once every five years, might be more effective. Of course, such discipline is easier said than done..) However, since the return for 2024 is not finalized yet, I excluded this year’s return from the average calculations and future statistics.

Out of the 24 elections, there were 21 years (84%) with gains and 4 years (16%) with losses. Among the 21 years of gains, 13 had gains of 15% or more. The 0.5% gain in 1960 is minimal but still a gain.

Average Returns of S&P 500 in an Election Year

The overall average return for election years is 11.6%, which is slightly lower than the S&P 500 total annual return average of 12.2% (arithmetic average of annual returns since 1926). However, a noticeable difference exists between years when incumbent presidents seek reelection and those when they do not. As you know, U.S. presidents can only serve two terms. Incumbent presidents usually seek reelection unless there are significant issues. There have been 16 such instances since 1928, and the S&P 500’s average return in those years was 12.5%. In contrast, in the 8 years without an incumbent seeking reelection, the average return was 8.0% only. This may suggest that incumbent presidents seeking reelection tend to use all available economic policies to boost the economy and stock market. Presidents who must leave office after two terms may not push as hard.

So, how should we view this year? In the Biden vs. Trump match-up, it was clearly an incumbent’s reelection attempt, but after the Harris vs. Trump scenario emerged, it is no longer a direct reelection attempt. However, should we view it differently? Harris, who was effectively nominated by Biden, can be seen as Biden’s successor. She won the election with Biden in 2020 and has been serving as vice president for four years so I believe we can think of this year as a reelection cases.

How does this year's S&P 500 return fare in comparison?

Returning to the current S&P 500 total return, as of September 6, 2024, it’s already at 14.5%. Comparing this with various averages in the above table, the current rise in the S&P 500 index this year seems overheated. Of course, compared to the highest level in election years, which was in 1928, there is still room for an additional 29.1 percentage points of increase (since this is based on the increase from the beginning of the year, the further increase from the current level would be 25.4%). Since nobody can predict the stock market, it's possible that it could rise even more by the end of the year even though it seems highly unlikely.

However, if the S&P 500 were to rise by more than 25% from now on, similar to 1928, it would be concerning. This is because 1928 was the year before the Great Depression. After the stock market soared dramatically until September 1929, it dropped nearly 90% by July 1932.

I am not predicting whether the U.S. stock market will decline or rise from here. I am simply pointing out that, when comparing the S&P 500's performance from the beginning of the year to now with past election years and instances of reelection, the current return is still high even after the 4.2% drop in the first week of September.

First Half vs. Second Half Returns of an Election Year

Since I have only analyzed annual data, I was curious about the performance of the stock market in the first half versus the second half of an election year, or six months before versus six months after the election. While I considered creating this data myself, I found an excellent analysis from T. Rowe Price (a global asset management company with over $1.5 trillion in assets). Their analysis covers the period from 1928 to 2023, which matches the period I analyzed, excluding the current year.

The analysis compares the average and median (the middle value in a sorted dataset) of election years versus non-election years. For consistency, I will refer to the average values. There was an excess return of 4.2% for six months, 2.2% for three months, and 0.5% for one month leading up to the election. The surprising part is the post-election results. There was a comparative loss of -1.3% for one month, -1.7% for three months, -1.4% for six months, and -2.2% for one year. If the excess returns before the election are seen as results of the government's extraordinary economic and stock market stimulus, then the comparative losses after the election are understandable. To clarify, a comparative loss does not necessarily mean an actual loss. For example, if the annual average return of the S&P 500 in non-election years is 10.8%, a comparative loss of -2.2% over a year would still mean a 8.6% gain on average.

Summary

S&P 500's average annual total return since 1926 is 12.2% (arithmetic average of annual returns). In comparison, average annual return of U.S. presidential election year is 11.6%. But there is a significant difference between years when incumbent presidents seek reelection and those when they do not. For a reelection year, the average total return of S&P 500 was 12.5% while it was 8.0% only for a non-reelection year. S&P 500 total return so far this year is 14.5% (as of September 6, 2024) even after the 4.2% drop in the first week of September. It's still above the historical average return of 12.5% in a reelection year.

I trust in the strength of the United States as a nation, the overall U.S. stock market, and the major companies in the S&P 500. However, given the significant returns already achieved by the S&P 500 so far this year (and high valuations, which I plan to write about separately in this blog), it seems better to invest defensively for the rest of the year or at least until the election.

Thanks for reading. Wish you grow rich slowly and surely!

This blog does not offer investment, financial, or advisory services. The information provided herein is for general informational purposes only and should not be interpreted as advice for making specific investment decisions. All investments involve risk, and past performance is not indicative of future results. It is advisable to consult with a qualified financial advisor to determine strategies or products that are appropriate for your individual circumstances.

The owner, writer, or operator of this blog accepts no responsibility for any direct or indirect losses that may arise from the use of or reliance on the content presented. The information provided on this blog is subject to change and may not be current. The content is based on personal opinions, as well as information from news sources and research, and may vary due to shifts in personal opinions, financial market conditions, or other influencing factors.

Most data referenced is derived from daily closing prices. Data finding, sorting, graphing, and analysis are performed primarily by myself, and while efforts are made to ensure accuracy, errors may be present. If you identify any inaccuracies, please inform me via comments or email, and I will endeavor to review and correct them as necessary. External content or images will be cited to the best of my ability.