How Does the Market React to Elections?

by Alyssa Oursler | November 6, 2012 1:54 pm

The S&P 500 got started back in 1957. Since then, it has enjoyed ten different presidents courtesy of thirteen suspenseful Election Days.

And today, of course, marks the fourteenth. Voters are flocking to polls, ballots are getting cast and, soon, the world will know who the next president of the United States will be.

Pundits have been busy speculating about who will come out on top, just as investors have been trying to figure out what the results could mean for the market — and their portfolios.

Sometimes, though, the best way to move forward is to look backward. How has the stock market fared on and after elections in past years?

Let’s take a look at the S&P and find out.

Election Day

Until 1980, the stock market was actually closed on Election Day[1]. Since that unofficial holiday ended, though, the market has moved upward more often than not as voters moved to cast their votes.

The S&P 500 started off strong with gains in the first three market-open elections — 1980, 1984 and 1988. It then recorded slight losses in 1992 and later recorded consecutive drops on Election Day in 2000 and 2004.

Losses tended to be smaller than gains, with movement in the black generally hovering around the 1% mark and downward movement remaining closer to zero.

This is evident by the S&P’s history since Election Day voting began: an average return of 0.61%, with the index ending in the black 63% of the time.

The biggest gain of all actually came in 2008 as President Obama battled John McCain. The index saw got a 1.7% boost on the day.

The Day After

Nothing lasts forever — and the novelty of any election wears off pretty fast. In fact, the day after a presidential election, the S&P 500 historically hasn’t performed very well.

Since the S&P 500’s inception, only four presidential elections were followed by gains — and the losses have gotten bigger with time. In the 1970s and 1980s, most losses were around 0.5%, maybe more. The market became more volatile post-election starting in 1996, though. That year, the S&P 500 gained around 1.5%, then lost the same amount four years later.

In its history, the index has generated at average return 0.4% in the red, with 63% of the days recording losses. The first significant fall came with a 1.5% drop after the 2000 election — which, of course, was the year of the Florida vote recount.

The biggest tumble of all came last election, with stocks losing around 3.9%. This fall comes with a pretty simple explanation as well: We were slipping into a financial crisis.

Next Six Months

One day shouldn’t be overemphasized, though; the market has made gains in the six months following an election. The S&P 500 only ended in the red four times since 1960.

Then again, two of those drops came relatively recently. In 2008, the market lost 5% over the six months following Obama’s victory as the Great Recession took its toll. And again, back in 2000, the market continued its downward movement after George W. Bush’s first victory. The S&P 500 had lost a whopping 12% a half-year after Election Day.

The other downers came in 1972 and 1976; the S&P 500 lost just under 6% in each six-month period after Richard Nixon and Jimmy Carter won, respectively.

In the remaining years, though, the elections at least appeared to help stocks move upward, as the index posted gains.

Still, such momentum isn’t necessarily anything to write home about. While stocks may climb in the six months following the election, the first year of the four-year election cycle is generally the weakest for the S&P[2].

Since 1900, stocks have gained an average of 3.4% in post-election years — dwarfed by gains of 4.0% in the midterm year, 11.3% in the pre-election year and 9.5% in an election year.

Source URL: https://investorplace.com/2012/11/how-does-the-market-react-to-elections/

---