With every election, there is some impact on the stock market as investors consider how the elected officials will affect economic policies. But just how much do elections actually affect the stock market? The year leading up to an election typically shows lower returns as investors cope with uncertainty. However, in the 12 months after an election, the market’s performance tends to be stronger than usual, regardless of which party is in office.

The Historical Impact of Elections on the Stock Market

Elections can have significant implications for the country’s direction. So, it’s understandable that they can also affect investor sentiment and overall market performance. To understand how elections impact the market, it’s helpful to reflect on the performance of the market during past elections. Of course—there is one caveat: Past performance is no guarantee of future returns.

There is always the possibility of the market acting in a completely different way than it has historically. However, looking at past performance can help you understand past patterns. Then you can judge whether the same or at least similar conditions prevail.

Presidential Elections

Presidential elections occur every four years, and they can shift the nation’s policies regarding foreign relations and domestic economic development. As a result, presidential elections can cause significant volatility in the market as investors cope with uncertainty about the country’s direction.

Analysts with the U.S. Bank looked at the market’s performance during past elections to identify patterns that occurred during election cycles. Generally, they found that the stock market’s performance was more muted in the 12 months leading up to the election.

That effect is true for both the equities market and bond markets:

• Equities. In the year leading up to a presidential election, equities gained an average of less than 6%. During non-election years, the average is more than 8%.
• Bonds. Bonds tend to deliver returns of about 6.5% leading up to presidential elections, significantly less than the 7.5% returns they usually deliver.

After midterm elections—so-named because they come about two years into a president’s term—the market tends to rebound quickly. But that’s not the case for presidential elections. Stock market returns tend to be lower for the first year after the election, while bonds tend to outperform their normal levels.

If a new party is elected to the presidency, the stock market’s returns average 5%. When the same president is re-elected or the party retains the presidency, returns are slightly higher, averaging 6.5%.

If you’re worried your portfolio isn’t properly diversified or that you have the wrong allocation for your needs, time frame, and risk tolerance, it may be helpful to consult with a financial advisor. They can review your portfolio and provide personalized advice based on your current finances and goals.