Election Years Produce Strong Returns

During election years, the market tends to go up. Since 1928, the S&P 500 index total return has been 11.25%, according to Morningstar and Ibbotson Associates.* Should history repeat itself in 2020, an 11.25% return this year on top of 2019’s spectacular 31.5% return would represent a two-year haul of 43%.

Two of the oft-cited reasons for election-year boons are that incumbents tend to unleash voter-friendly initiatives, such as tax cuts or spending programs on items like infrastructure or Medicare. The other reason is that incumbents tend to win, and when incumbents win, there’s little to no change in policies, and if there’s one thing markets love, it’s predictability. Markets also hate surprises, which is one reason that the political gridlock is manna to investors and a nightmare for taxpayers.

Yet, at the dawning of 2020, the possibility of surprises stretch as far as the eye can see. Will we come to a trade agreement with China? Are hostilities with Iran going to escalate? Will we confront North Korea? Is Russia going to interfere with our elections? Will the president be impeached, or perhaps worse, be tried in such a way that provokes a constitutional crisis? In light of these and other developments, can markets produce an 11% return?

In 1996, when Bill Clinton won a second term, the market returned about 23%, despite…

  • A government shutdown over a budget impasse**
  • The Taliban, who few in America had ever heard of, capturing the capital of Afghanistan.***
  • The People’s Republic of China conducting surface-to-surface missile testing and military exercises off the Taiwanese coast.
  • Osama bin Laden declaring jihad against Americans.
  • The Whitewater investigation of the Clintons.****

It’s been 24 years since these developments made headlines and time tends to diminish their severity. Still, the market was able to climb the wall of worry in 1996, and it just may be able to climb it again in 2020.

David R. Evanson is a financial journalist in Philadelphia.

*Anonymous, (2019). S&P 500 Index Returns in U.S. Presidential Election Years. First Trust. Retrieved January, 2020
**Anonymous, (2019). 1996 United States federal budget. Wikipedia. Retrieved January, 2020
***Anonymous, (2020). 1996. Wikipedia. Retrieved January, 2020
****Anonymous, (2020). Whitewater controversy. Wikipedia. Retrieved January, 2020