On November 5, American voters will elect their next President, along with the 435 members of the House of Representatives and 34 of the 100 people who form the Senate. What will the markets be doing on the day after the results? As always in the world of finance, past performance is no guarantee of future performance and it would be rash to start making predictions. Nonetheless, here are a few historical facts that shed some interesting light on this question.  

1. Trump or Biden? 

First, let’s take a look at the recent past. It would be hard to imagine two more different presidencies than those of Donald Trump and Joe Biden. Which of the two did better for investors? Analysts have compared the performance of the S&P 500 index for the first three-and-a-half years of each president’s term. Their findings: returns were more or less the same in each case, which suggests that, where the markets are concerned, macroeconomic factors such as business productivity and monetary policy matter at least as much as who is living in the White House. 

2. It could be risky to mix politics and business 

That said, what about the long term? Let’s start by considering two theoretical scenarios. Scenario 1: someone invested $10,000 in the U.S. stock market in 1950, but only kept the money in the market during Republican presidencies. What’s the person’s annual average return after all those years? About 2.8%, resulting in a total of about $77,000. Scenario 2: the person invested the same amount, but only kept it in the market during Democratic presidencies. The return: about 5.11%, for a total of just over $405,000. Of course, the difference is probably not solely due to whether the president was red or blue: financial, economic and geopolitical factors may also have played a role.  
 
In fact, the real lesson comes in the third line of the graph, which shows that this investor’s annual average return would have been 8.05%, for a total of $3.1 million dollars today, if the money had been left invested in the market the whole time. 

Here are some even more telling figures. We did the same exercise, but moved the starting date back to 1900. Conclusion: while it might be tempting to rebalance your portfolio based on the policies of the presidential candidates, history shows that it’s profitable to stay true to your long-term strategy and, above all, to stay in the market.  

3. What about Congress: red, blue or purple? 

The separation-of-powers principle ensures that the president shares power with Congress, which is made up of the House of Representatives and the Senate. One might think that divided power would lead to the State being paralyzed. This may happen from time to time, but the markets seem to handle this situation rather well because it favours stability and prevents the introduction of radical measures. In fact, since the 1950s, the highest average annual returns have occurred when the president was a Democrat and both Chambers of Congress were Republican. 

4. The election cycle theory – heard of it? 

A theory developed in the 1960s suggests that stock market performance tends to follow a “presidential election cycle,” and varies depending on the year of the presidential term. According to this theory, average annual stock market returns, as expressed by changes in the S&P 500 index, tend to be much higher in the third year of the term. 

Other studies, based on the Dow Jones index, indicate that returns tend to pick up steam in the second half of the term, especially during the third year.  

Before accepting these theories at face value, it should be remembered that elections only take place every four years, so the sample size is rather limited.  

5. Volatility could play a part 

The following graph gives an idea of the volatility of returns during each year of the presidential cycle. Evidently, the third year is also when the spread between the lowest and highest returns is least pronounced. On the other hand, the fourth year of the term (where we are currently at) is the one where this spread is the greatest. 

Our final graph is similar. Here, we see that during election years, investors hesitate which is expressed by the VIX volatility index. It increases in the six months leading up to the election, then decrease during the following six months. 

And if the markets could predict the results? 

If all these theories haven’t left your head spinning, here’s a final one. Some studies have actually shown a correlation between the performance of the S&P 500 index during the three months preceding an election and the results of the vote. If the S&P 500 rises, the party in power has an 8 out of 10 chance of retaining the presidency. But if the S&P 500 falls, the odds drop to 1 in 10. Draw your own conclusions! 

In closing, always keep in mind that the past is no guarantee of the future. Statistics can lead to different conclusions depending on the variables and time periods chosen. Above all, that staying true to your strategy can often be a better choice than trying to make long-term decisions based on short-term events. 

In any case, if you find that the November 5 elections are a source of concern, feel free to discuss this with your advisor.