With another U.S. presidential election season in full swing, many investors are questioning if this will be the cycle that changes everything—or if it’s just more noise in a long-term investment plan. As media headlines predict doom or glory depending on party outcomes, it’s easy to feel the pull to adjust your portfolio. But history shows that elections don’t sway the market’s long-term trajectory as much as we might think. Let’s explore what we know from past elections and the true role politics play in market performance, with an emphasis on why it’s essential to “vote with your ballot, not your life savings.”
Historical Trends: Minimal Long-Term Impact
One of the main takeaways from past election years is that markets are surprisingly resilient across administrations, parties, and policies. Looking back as far as 1928, the S&P 500 average annualized return has been right around 10%. In election years during the same time, market returns have been right near that average.1 While there’s often a spike in volatility as the election draws near, data shows that markets eventually stabilize, regardless of the political landscape.
As we know, the stock market doesn’t think Democrat or Republican. Instead, it thinks green: profitability, innovation, and growth. It doesn’t ignore who is in office—policy does matter, especially on a sector level—but history repeatedly shows that the market isn’t easily swayed by political sentiment alone.
The Role of Policy Uncertainty in Volatility
Election season often brings an uptick in volatility due to the “policy uncertainty premium.” Investors tend to avoid uncertainty, and election cycles tend to heighten it—whether it’s concerns over tax policies, trade, or regulatory changes. Many assume that volatility will spike around elections, but it’s not as pronounced as we might expect. If we look at monthly data from 1926 to 2023, for example, the months with elections (whether the winner was Democrat or Republican) show no significant deviation in returns compared to non-election months.2
To put it plainly: while the headlines are shouting about the stakes of each election, the market remains relatively calm. This aligns with the idea that, while the political piece is a factor, it’s just one part of a larger economic puzzle.
Sector-Specific Sensitivity: Which Industries Feel It the Most?
While the market’s overall trajectory isn’t greatly impacted, specific sectors can be more sensitive to election results. Democratic administrations typically favor renewable energy, healthcare, and technology through climate-focused and innovation-driven policies. Meanwhile, Republican administrations are generally seen as advantageous for financials, energy, and industrials, as they prioritize deregulation and tax cuts.
For retirees and investors with sector-specific interests—such as clean energy ETFs or traditional energy stocks—short-term gains or losses are likely. But here’s the catch: betting too heavily on any particular election outcome can backfire, as markets often react unpredictably to new policies. A diversified portfolio helps to mitigate sector-specific risk, allowing investors to benefit regardless of which sectors surge or dip post-election.
The “Value, Size, and Profitability” Premiums in Your Portfolio
Beyond the election’s effect on broad market indices or sectors, the “premiums” we seek in investing—value, size, and profitability—play a more influential role in returns over time. These premiums reflect the kinds of stocks that may yield higher returns due to their intrinsic qualities, rather than the latest political developments.
For instance, small-cap stocks, which represent the size premium, are often less influenced by political outcomes than large caps, as their performance is tied more closely to internal growth potential rather than broader economic or regulatory changes. Value stocks, another premium, tend to trade at prices below their intrinsic value and can benefit from economic cycles regardless of election results. Finally, the profitability premium highlights companies with high operating profits relative to their expenses, making them resilient in various market conditions.
These premiums are designed to capture returns that might outperform the broad market, regardless of who’s in office. By focusing on such factors, investors can stay grounded in investment fundamentals rather than reacting to political changes.
Global and Economic Contexts: The Bigger Drivers of Market Performance
What truly drives markets, if not elections? Broader economic and global conditions wield a much more substantial impact. For example, inflation trends, Federal Reserve interest rate decisions, and international events historically have a more significant effect on market performance than election outcomes.3
Take the 2020 election, which took place amid the COVID-19 pandemic—a global crisis that drove much of the volatility that year. Similarly, current concerns like inflation, ongoing geopolitical tensions, and supply chain challenges can all play pivotal roles in shaping market performance, with election results being only one consideration in the broader economic context.
This serves as a reminder for retirees and investors alike to stay focused on the bigger picture, which is typically more influenced by these broader forces than by election outcomes alone.
Conclusion: Stick to a Long-Term Strategy and Avoid Reactionary Moves
When election season arrives, it’s easy to get swept up in the hype and make emotional decisions. But history shows that stock market performance is largely driven by economic fundamentals rather than who’s in office. A diversified portfolio with a focus on factors like profitability, value, and size will typically prove more resilient than any “election-proof” strategy.
So, as you consider the coming election, remember, political shifts come and go, but long-term investment fundamentals are here to stay. By sticking to your financial plan, staying invested, and letting the “premiums” work their course, you’ll be well prepared for both the short-term fluctuations and the long-term journey.
Sources
1. https://my.dimensional.com/bulls-bears-and-ballots-when-looking-at-politics-and-markets-think-long-term
3. https://www.dimensional.com/us-en/insights/how-much-impact-does-the-president-have-on-stocks
