Elections and Markets - 2020

August 26, 2020

The US elections have been a sideshow to the critical issues facing America this year. With the Democratic National Convention just wrapping up and the Republicans convening this week, that is changing, and investors are naturally wondering how the outcome of November’s elections might impact the investment landscape. Perhaps more interesting are pre-election dynamics: Do markets tend to predict election results?  

Historically, US stocks have fared better with a Democrat in the White House. According to a Journal of Finance study published in 2003, the annual outperformance averaged 9% between 1928 and 2003, a remarkably wide margin considering it is the Republican party that is thought to be more business-friendly. In a follow-up study, two Federal Reserve economists drilled back to 1852 and adjusted for market volatility. The Democrat advantage shrank to below 4%. Of course, this time could be different and other political constellations may matter more to the markets.

A pivotal question is whether control of the executive and legislative branches remains politically divided, thus giving rise to several more years of policy headbutting and gridlock. If Biden wins the White House, Democrats could gain a Senate majority by flipping just three seats, with the Vice President casting a tie-breaking vote. A “blue wave” would introduce tax and spending policy uncertainty that is typically unsettling to markets. Potential market negatives could be offset by friendlier tariffs and new fiscal stimulus, including an overdue boost to infrastructure investment. Regardless of who wins, the pandemic and today’s economic challenges are likely to dictate a continuation of monetary and fiscal stimulus. 

How might the markets react to a Democrat sweep? History offers some perspective. Since World War II, there have been five instances where a Democratic president was elected with his party also in full control of Congress: 1948, 1960, 1976, 1992 and 2008. On average, the S&P fell 2.4% in November of the election year only to rebound 3.1% in December. The S&P went on to rise in the ensuing year in four out of the five episodes, averaging a 10.4% return overall.  

Of course, markets do not patiently await the results of elections for their marching orders. Some market watchers believe the stocks are the best predictor of presidential races. The thinking goes that rising share prices are an indicator that consumer sentiment and confidence are running high. In such a scenario, consumers are going to vote for the incumbent to serve up more of the same policies. Conversely, falling markets are a sign that consumers are not happy, and this dissatisfaction will be taken out on the incumbent. 

According to Strategas Research Partners*, “the S&P 500 has predicted every presidential election winner since 1984 and 87% of the winners since 1928, and it’s really about the performance of stocks in the 90-days before the election.” As we sit today, the S&P is up 3.9% from the beginning (August 3rd) of that period.

However, a lot can happen over the next nine weeks. Polls got it wrong in 2016 and may miss the mark again.  Modelers are struggling to account for the shift to mail-in voting. In addition, many ballots will be cast long before all three presidential debates occur.  

In assessing market patterns now or at any time, we must consider whether we are witnessing causation or correlation. The connection between the president’s party affiliation and market returns may be just a historical curiosity. 

Does the absence of meaningful explanatory power mean that it doesn’t matter who wins in November? No. It means other factors have a far greater impact on market returns. Our energy is best spent on identifying stocks that are attractively priced on an absolute basis and that are underpinned by business strategies capable of succeeding, whichever way the political winds are blowing.


The three elections since 1928 where the stock market incorrectly predicted the winner of the presidential election were:

  1. 1) 1956 – incumbent Dwight Eisenhower was reelected despite the S&P 500 falling 3.2% in the three months before the election.
  2. 2) 1968 - incumbent Vice President Hubert Humphrey lost to Richard Nixon despite the S&P 500 rising 6% before the election.
  3. 3) 1980 - incumbent Jimmy Carter lost to Ronald Reagan despite the S&P 500 rising 6.9% before the election.