Dear Valued Clients,
With the upcoming U.S. election on the horizon, many of you have expressed interest in its potential impact on the financial markets. I want to take a moment to share some insights, based on historical trends, to help you navigate this period with greater confidence as part of your wealth strategy.
While party leaders often promise that their economic policies will bring more prosperity than those of their rivals, a closer look at the historical data suggests their impact on the financial markets may not be as pronounced as this political rhetoric often contends. A study published by Research Affiliates in 2017 found little difference in market performance under Republican or Democratic presidents.
A more recent study by Y Charts, published this summer, looked at the S&P 500’s performance dating back to 1961. It found that the index posted negative returns under only two presidencies —Richard Nixon and George W. Bush. Over the long term, the S&P 500 has consistently grown, regardless of which party was in power.
While elections can evoke strong feelings and stir debate, the market’s performance, over time, appears less tied to political control than we might expect. However, short-term market behavior can vary based on the nature of the election, which is what we’ll unpack now.
Election Uncertainty and Market Behavior
Markets have historically responded to election cycles, not just to the results but also to the uncertainty that surrounds them.
The Chicago Board Options Exchange (CBOE) Volatility Index (VIX), often referred to as the “fear index,” tends to spike in the weeks leading up to an election. However, this volatility typically subsides in the months following the election, particularly as the market digests the result and begins to factor in the policies of the incoming administration. Interestingly, in periods of divided government—when control of the White House and Congress is split between different parties—the market tends to perform better. This configuration is often seen as limiting the potential for sweeping policy changes, providing a sense of stability to investors. Conversely, when one party holds both the presidency and Congress, uncertainty can increase due to the potential for more dramatic policy shifts, which can lead to greater market movements…
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