U.S. Elections and the Equity Market

Written by: AGF | AGF

How stocks perform in relation to presidential cycles may be more coincidence than correlation, but the historical relationship is no less interesting for investors to contemplate as the U.S. election campaign enters the final stretch. Here are a few different takes on how politics and equity markets have coalesced over the years.

1. Third Year’s a Charm

The S&P 500 Index has netted positive annualized returns on average in each year of the four-year U.S. presidential cycles since 1960, but it’s the third year in office that has coincided with the biggest gains. And what about the most volatile year of the cycle for stocks? That would be the first year, which corresponds with the largest average standard deviation of returns.

Source: AGFiQ with data from Bloomberg LP. Yearly index returns are based on inauguration dates starting January 20, 1961. Index performance related to Trump’s current term ends as of September 30, 2020.

2. Beginner’s Luck

S&P 500 returns were higher on average during the 10 first-term, elected presidencies that have occurred since 1960 than during the five second-term presidencies. Moreover, through this lens, re-elections have been associated with much bigger equity losses and smaller gains. Barack Obama’s first stretch in office, for example, syncs with the highest index return (101%) of any presidential term over this period, while gains during Bill Clinton’s first term rank second (99%). However, both Richard Nixon’s scandal-shortened second term and George W. Bush’s final four years were met with index losses of more than 26%.

Source: AGFiQ with data from Bloomberg LP. Returns are based on four-year presidential cycles starting on inauguration dates in January the year following an election and ending on the day before the next inauguration. With the following exceptions:  Kennedy 1st term (January 20, 1961 through November 22, 1963), Nixon 2nd term (January 20, 1973 to July 31, 1974), Trump 1st term (January 20, 2017 through September 30, 2020). Johnson and Ford’s unelected time in office following these two shortened terms between November 22 and January 19, 1965 and August 9, 1974 to January 19, 1977, respectively, are not included in these calculations.

3. Red or Blue but Almost Always in the Black

What U.S. political party has a right to boast about their market-friendly history? The short answer is both, given how well the S&P 500 has usually fared when either a Democratic or Republican President has held office during the past 60 years. The one big exception? George W. Bush’s eight-year tenure bookmarked by the Tech Wreck and Great Financial Crisis.

Source: AGFiQ with data from Bloomberg LP. Returns are compounded from a starting value of $1 on the inauguration day of each president’s first term in office and re-adjusted at a higher base in the case of second terms. Index performance related to Trump’s current term ends as of September 30, 2020.

4. It’s Under Control

There have been 30 U.S. congressional terms since 1961, but only 11 of those two-year terms occurred when one of the two major U.S. political parties controlled the U.S. House of Representatives and U.S. Senate, while also holding office at the White House. Meanwhile, in the eight instances of unified Democratic government, the S&P 500 returned 26.7%, on average, or just one-tenth of a percentage point better than the average in the three terms of Republican control.

Source: AGFiQ with data from Bloomberg LP. Returns are based on U.S. congressional cycles since 1961 starting at the beginning of the month (January 1st) in which Congress convenes every two years and ends on the last day of the month (December 31st) before the next term is convened. Index performance coinciding with the current 116th Congress ends as of September 30, 2020

5. Waiting on a Winner

U.S. presidential elections are rarely disputed. In fact, the Washington Post recently identified the campaigns of 1824, 1876, 1960 and 2000 as the only four in American history to produce contested outcomes. But if it does happen again, investors may want to watch out. Not only did the S&P 500 fall during the month that George W. Bush’s first-term victory was being contested, it also dropped in the 60 days before the election and 60 days after he was officially declared the winner.

Source: AGFiQ with data from Bloomberg LP.  

Related: Rethinking the Preference for Preferred Shares