Is a presidency’s fourth year the best for the stock market?

Presidential election effects on the stock market

With the election less than a year away, you might be wondering if it’s time to make changes to your portfolio. As media coverage ramps up and emotions run high, it is important to maintain discipline and resist the temptation to make changes to your investments.

There will be a plethora of articles and pundits who point out supposed patterns or theories when it comes to the market (they often like to say that the fourth year of a presidency is generally the best for the stock market, while the first year is the worst, or if the incumbent candidate wins that is better for the stock market). Remember these individuals are trying to generate clicks, and acting on their theories is almost always a bad idea.

What does the evidence show?

When we look at the evidence, it shows that the U.S. stock market has generally performed well through both Republican and Democratic administrations.

Markets have rewarded long-term investors under a variety of presidents

Growth of a dollar invested in the S&P 500: January 1926–December 2018

Growth of a dollar invested in the S&P 500: January 1926–December 2018

Source: Dimensional Fund Advisors

Additionally, when we look at major stock and bond market indexes, we see that they have, on average, posted positive performance both during election years as well as in the year after an election. You can see this from the returns in the table below:

  Average return during election year Average return year after election
S&P 500 Index 11.3% 9.9%
MSCI EAFE Index 6.0% 14.5%
MSCI Emerging Markets Index 3.8% 34.4%
Bloomberg Barclays Aggregate Index 7.6% 7.3%

Source: Dimensional Fund Advisors

This does not mean that a negative year for your portfolio is not possible during an election year. Both 2000 and 2008 were election years in which stock markets posted negative returns; however, those negative years tend to occur less frequently than the positive years. Accurately predicting when those down election years will occur is nearly impossible, just like trying to predict any down year in the market.

The take-away: Continue with a sound strategy

The stock market is made up of thousands of different companies around the world. While changes in law and regulatory environment undoubtedly can have an impact on the growth and profitability of companies, the evidence shows that companies have flourished, and investors have been rewarded for investing their financial capital, under the policies of both Republican and Democratic administrations.

Your candidate or party of choice may or may not win at the ballot box next year. By taking the emotions out of investing, you can rest assured that your portfolio is well-positioned either way.

If you have any questions about how to put together a well-positioned portfolio or would like to develop one, contact an advisor at Wipfli Financial.

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Rafia Hasan
Rafia Hasan

CFA, CFP® | Principal, Chief Investment Officer

Rafia Hasan, CFA, CFP®, is the Principal and Chief Investment Officer for Wipfli Financial Advisors, based in Chicago, IL. Rafia leads Wipfli Financial's Investment Committee and has a deep knowledge of the financial markets, specifically in the areas of alternative investments and private equity. She also specializes in personal financial planning and estate planning for women investors.

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Is a presidency’s fourth year the best for the stock market?

time to read: 2 min