Fear an Election Day Selloff?
Updated: Nov 5, 2020
Trump vs. Biden. Does it matter? Of course it does. With 84 days until the election, the conversations around the dinner table and over the airwaves are increasingly centered around who will win and how that win will affect this country. Today, we’re taking a myopic view of the effects of the election: the short-term impact on the stock market.
A legitimate concern I’ve heard with great frequency lately is the worrying about the stock market performance around the election. Will the market become unsettled before the election? If Trump wins – or if Biden wins – will the market cheer or frown? For some guidance, let’s dive into the numbers and see what we find.
Since the start of the 20th century, there have been 30 presidential elections[i]. Since the U.S. has a two-party system (with some rare exceptions), there are two binary outcomes for each election: the party in power stays in power, or the party in power loses power. Here is a breakdown of the transition of power by party in each election:
The sample size is small. But fortunately, it is relatively evenly distributed. From here, we can start to isolate stock market performance around the election. In this analysis, performance is measured around election day, since that is when the incoming party is known with certainty. For practical reasons, is it assumed that election day is November 1st of the election year (in reality, election day is the first Tuesday of November).
Here’s how the market[ii] faired in the one month prior to the election and the one month after the election:
And if we zoom out to three months prior and three months after the election, here are the returns:
Finally, looking out to six months prior to and after the election, market returns follow:
Looking at the figures above, a few highlights stand out:
In general, the transition of power from Republicans saw better returns both before and after the election than the transition of power from Democrats. This holds whether power transitions from Republican to Republican or Republican to Democrat.
Democrat to Democrat transitions tends to have the lowest returns both before and after the elections.
Most importantly, all returns, irrespective of times frames and transitioning parties, are well within the expected ranges based on average returns and their respective variances. For example, the average one-month return is 0.5% with a variance of 4.3%. This means that most one-month returns should fall between -3.8% and 4.8%. Indeed, the average one-month returns before and after the election fall within this range. This holds for the three- and six-month ranges as well.
In short, average market performance around elections was no different than average market performance at any other time. More to the point, making investment decisions strictly based on presumptive or confirmed election results may not be an optimal strategy.
[i] Throughout the paper, references to the stock market refer to the S&P 500 and, prior to its creation, extrapolated values of the hypothetical S&P 500. All stock market data is derived from https://www.multpl.com/s-p-500-historical-prices/table/by-month. Detailed descriptions of the stock market values and there derivations is available at this site. Note that all indices are unmanaged and are not available for direct investment. [ii] Election data is derived from https://en.wikipedia.org/wiki/United_States_presidential_election