How Will the Presidential Election Affect Investors?

The debates have passed; the political ads are revving up; and families are already arguing politics over Sunday dinner.

Over the next few weeks, you will hear countless promises and lots of mistruths about what may or may not happen to investors after the presidential election, depending on who inhabits the White House and Congress in January.

And you’ll likely hear a lot about how great the stock market will be if so-and-so wins the Oval Office.

But the truth is, presidential elections don’t actually affect investors much at all.

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U.S. Bank recently published a comprehensive study over 75 years which showed just that—over the medium to long term, the elections did very little for the markets.

Instead, the report noted that “market returns are typically more dependent on trends rather than election results.”

Going back to 1948, U.S. Bank reported that there were just two scenarios that led to positive returns greater than long-term average returns:

· Democratic control of the White House and full Republican control of Congress.

· Democratic control of the White House and split party control of the Senate and House.

And just one scenario ended up with positive absolute returns modestly below the long-term average: Republican control of the White House and full Democratic control of Congress.

You can see the study’s results in the following chart:

Source: USBank.com

I found another study with similar results, from Morgan Stanley, which reviewed the past 23 elections since the S&P 500 Index began.

Their results in the corresponding election years:

· 19 of the 23 elections (83%) provided positive performance.

· When a Democrat was in office and a new Democrat was elected, the total return for the year averaged 11.0%.

· When a Democrat was in office and a Republican was elected, the total return for the year averaged 12.9%.

This chart summarizes the markets’ gains by president, since 1928:

The U.S. Bank study went on to suggest that investors look at economic trends in determining the direction of the stock market. They noted that “rising economic growth and falling inflation have been associated with returns that are considered above long-term averages, while falling growth and rising inflation have corresponded to positive but below average market returns.”

Source: USBank.com

How Will the First Year After the Election Affect Investors?

One of my past newsletter contributors, Jeffrey Hirsch of The Stock Trader’s Almanac, has accumulated data since 1896 and says the first year following a new president being elected is usually the weakest:

· Year after the election: +3.0%

· Second-year: +4.0%

· Third-year: +16.4%

· Fourth-year: +6.6%

Bottom line, while it’s fun to look at the statistics, the real action in the market almost always leads back to the economy and earnings. Earnings generally drive market prices. If the economy is strong and companies produce growing earnings, in general, their stocks rise.

So don’t worry too much about how the presidential election could affect investors, for the time being, it’s still a strong bull market.

And as you can see below, large-cap stocks—especially growth companies—are still leading the market.

U.S. Equities - Russell Indexes

Source: SeekingAlpha.com

So far in 2024, the following growth companies have produced the highest returns:

Top 5 S&P 500 Components by Year-to-Date Returns

Source: slickcharts.com

With that in mind, I took a look at some of the best-performing growth stocks, with the following results:

As you can see, two are healthcare companies and one is a pet food business. While past returns are no guarantee of future results, perhaps one of these companies will suit your portfolio strategy.

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