Quick quiz: Which U.S. President of the last 70 years presided over the largest overall percentage gain in the stock market? If you answered Bill Clinton, you are correct. Over his eight years in office from 1993-2001 the S&P 500 increased by 210%. Number two on that list is Barack Obama, who saw the stock market gain 181% during his eight years in power from 2009 to 2017.
On the flipside of the equation, of the 13 men who have served as President since 1950, only two of them have seen the stock market fall over the course of their tenures. George W. Bush, who had the S&P 500 drop by 37% over his eight-year presidency, and Richard Nixon, who experienced a 20% loss during the five years he spent in office before resigning in 1974.
My first takeaway from the above data: So much for the idea that the stock market loves free market-friendly Republican administrations and despises the taxation-happy Democratic administrations.
My second takeaway: As an investor, what should I do with this information?
The above numbers come from the excellent free report from YCharts titled, “How Do Presidential Elections Impact the Stock Market?”1 The whole piece is filled with interesting facts and fantastic graphics like the one below that illustrates the stock market performance numbers for each President since 1950.
The issue with both analysis like this, and the number of Wall Street strategists publishing election previews and predictions right now, is that this material is genuinely interesting to read about — I can’t get enough of the stuff personally. However, it can also lead many to think they should be making changes to their portfolio based on what they think will unfold in the upcoming election. This is almost always a bad decision, because it relies on you correctly predicting two separate and distinct events: (1) the election result, and (2) the stock market’s reaction to the election result. If you think you can get both these predictions right on a regular basis, you are probably fooling yourself.
To prove my point on why making investment decisions based on political forecasts is a fool’s errand, all we have to do is go back four years to examine the consensus opinion of how a Trump win in 2016 would affect the stock market.
Economists: A Trump win would tank the markets (October 2016)2
The above headline comes from a story that ran in Politico in October 2016, but it really reflects the mainstream consensus viewpoint of the effects of a Trump 2016 election win at that time. The whole piece is worth a read for a time capsule snapshot of how certain we all were in October 2016 that Hillary Clinton was on her way to becoming President. With that said, the economists’ and strategists’ predictions of what would happen if Trump somehow did win have not aged well.
As it became clear that Trump had won the election in the early hours of November 9, 2016, the market initially reacted the way everyone thought it would: Dow Jones futures plunged 900 points as market participants reacted to the uncertainty around how Trump would govern after his shock win. This uncertainty lasted less than a day, as by the time markets closed on November 9, they were 1% higher than they had been prior to the election results coming in on November 8.
Regardless of how you feel about Trump, you can’t make the argument that the stock market has not done well over the past four years. As the above chart illustrates, the stock market is up almost 50% since his win in 2016.
Perhaps the most important takeaway from that chart is a simple one: stocks generally go up, not down. The last 70 years have seen a huge amount of turmoil in the U.S. including the beginning and end of the Cold War, a presidential assassination, the Vietnam War, Black Monday, the Dot Com Bubble, 9/11, the Global Financial Crisis, COVID-19, and the list goes on. However, despite all these events, if you invested $1,000 in the S&P 500 in 1950 and then forgot about it for 70 years, you’d be happy to find out that your $1,000 investment had turned into $813,000 in 2020.3
So how do you reposition your portfolio in advance of the upcoming election? It’s simple; you don’t. If you’re investing in stocks, you should be taking a long-term perspective, and shouldn’t let your opinions on the 2020 Presidential election influence your decision making. No matter who wins, I can guarantee they won’t be around forever (they’re both older than colour television is), and the stock market performance they preside over is impossible to predict in advance. In my opinion, the more you can keep political and economic forecasts out of your long-term investment decision making, the better.
So who do I think is going to win and what will it mean for stock markets? Personally, I think Biden wins big and stock markets react positively to the win. Just don’t hold me to it.