In this podcast conversation, I discuss the distinct market characteristics that occur in each year of the US election cycle. I emphasize that while politics alone doesn’t drive markets, the political seasonality provides a backdrop that can impact investor perception and response to other market factors.
I start by explaining the three possible political outcomes in a presidential election year: a clean sweep by one party, a divided government with one party controlling the presidency and the other controlling Congress, or a president of one party with a two out of three win in Congress. I acknowledge that geopolitical and domestic issues can vary widely from one cycle to the next, but the economy is always a major issue in presidential election years. I then delve into the historical trends in each year of the election cycle, using the S&P 500 stock index as a measuring stick.
I note that the first year, when a newly elected or re-elected president takes office, has historically produced an average annual total return of 18.6%. The second year, the midterm election year, has a lower average total return of 6.1% due to voter disappointment and legislative gridlock. The third year, the gridlock year, has consistently produced excellent average returns of 18.5% with no negative returns since 1980. The fourth year, the presidential election year, has an average total return of 8.8% and is the second weakest market year in the cycle. I also analyze the market performance based on the three possible election outcomes. When the GOP sweeps, the market does best with an average annualized gain of 11.9%. When the Democrats sweep, the annualized return is 8%.
In gridlock scenarios, the GOP still fares better with an average annualized return of 10.7% compared to the Democrats’ 6.1%. Interestingly, when a Republican is elected president, the annualized return is 20.3%, while a Democrat’s election results in a better return of 9.9%. I conclude by discussing the potential impact of the election on various sectors. For financials, a GOP win could lead to relaxed financial regulations and a positive backdrop for financial services consolidation.
A Democratic win could result in higher corporate tax rates and more regulatory oversight. In the healthcare sector, a Democratic win might lead to a strengthening of the Affordable Care Act and controls on drug pricing. In the energy sector, a GOP win could mean increased domestic oil, natural gas, and coal production, while a Democratic win could result in more regulation and taxes on oil and gas companies.
In the information technology sector, a GOP win could lead to intensified antitrust efforts and restrictions on HB1 work visas, while a Democratic win could result in expansion of the Chips Act and increased foreign trade. I acknowledge that there are always wild cards in every election that cannot be anticipated, but I provide insights based on historical trends and possible outcomes. I emphasize the value of being a long-term investor and caution against making investment decisions solely based on political factors.