With another presidential election upon us, many investors may wonder what could happen to their wealth once the votes have been counted. As the leading economic and military power in the world, policies conceived and implemented in Washington, D.C. can and do have important implications. And with high stakes comes high drama – this year is no exception. After two assassination attempts, rumors of presidential incapacity, and the swapping out of a major political party’s candidate, there seems to be more uncertainty this year than normal.
Many clients have asked if the current heightened uncertainties are causing us to think differently about portfolio construction or management. To be sure, we pay close attention to the policy implications that may result from changes in Washington, but we also recognize that long-term investment success comes from a disciplined approach that looks through the noise of political campaigns and instead focuses on evaluating the economy and markets. Regardless of who ends up in the Oval Office, the connection between presidential elections and financial markets is a complicated web of policy expectations, economic forecasts and investor sentiment.
Presidential candidates often propose sweeping policy changes that can directly impact the markets. From tax reforms and healthcare changes to trade policies and business incentive programs, these can all play a role. Campaign promises also influence investor sentiment and therefore the financial markets. And rhetoric that appears business-friendly – both from candidates and interpretations from traditional and social media – could lead to market optimism, while disruptive ideas could lead to volatility.
Rise, Fall and Rise Again
Below is a chart that tracks S&P 500 performance across presidencies since 1926. While both republicans and democrats experience peaks and valleys during each term, the value of the market tends to rise regardless of which party is in power.
Hypothetical Growth of $1 Invested in the S&P 500 Index 1926-2023
Historically, there has been market volatility during election years, especially in the months leading up to the election. This is often followed by some level of stabilization once the new president is in office and the administration’s policies begin to come to life. Yale Hirsch, creator of the Stock Trader’s Almanac, crafted a theory about how markets perform during each year of a presidential cycle.
In year one, markets often slide as the new president implements policies and reforms. Investors are mostly cautious during this period as there is often uncertainty about the new administration’s economic agenda. Year two sees an increase in market volatility. History has shown us this is typically the weakest period during a presidency as midterm elections can lead to political uncertainty or legislative gridlock. Year three is when presidents enter re-election mode and push for policies that stimulate the economy. This is often the strongest year for the stock market. Once year four rolls around, market performance can vary as presidential candidates begin to introduce new rhetoric and policy ideas.
In Conclusion
While the importance of elections on markets should not be discounted, it should be highlighted that what a candidate says during the campaign can be quite different from what they actually do once the votes are counted. This is because governing is different than campaigning. Every administration sees periods of rising and falling markets. Sometimes those market moves can be directly correlated with policy decisions, and sometimes not. There are instances when those policy initiatives match campaign rhetoric, but that’s not always the case.
Historically, markets have risen regardless of what party holds the White House. So, is Caprock predicting a strong market rally from here? No. Actually, we want to underscore how unpredictable markets can be. Market participants can choose to focus on any number of positive or negative market dynamics, which often send short-term prices in unexpected directions. Caprock believes in applying a long-term diversified approach to portfolio management, where we find compelling investment options that take the economic cycle into account but are not reliant on market predictions alone. Caprock believes that when it comes to election cycles, a disciplined process approach to portfolio management is more effective than market prediction.
Speak with an advisor to learn more about our investment strategy and approach.
The Caprock Group, LLC (“Caprock”) is an SEC Registered Investment Advisor. This communication is not an offer or solicitation with respect to the purchase or sale of any security and is for informational purposes only. Information contained herein has been derived from sources believed to be reliable, but Caprock makes no representations as to its accuracy or completeness. Investment in securities involves the risk of loss. Past performance is no guarantee of future returns. Registration with the SEC does not imply a certain level of skill or training.
