Should You Worry About the Impact of Presidential Elections on the Stock Market?

by Kevin on October 2, 2012

Every four years the radio, television, and general media companies of the United States enjoy a massive revenue boost thanks to the Presidential election. Millions upon millions of dollars are spent on 15 second radio spots and 30 second television attack ads. At the same time you start to hear a lot of chatter about what will happen to the stock market if either party wins.

As with most investing and political issues there is a lot more chatter than there is truth. At the end of the day it would be nice to know whether you should put all your money in stocks now — in hopes they skyrocket based on an anticipated election result — or hold off knowing that another deep dip in the market is coming where you will be able to buy at an even lower price.

But is there any way to anticipate that? And should you even bother?

Presidential Elections’ Impact on Stock Market Performance

MFS Investment Management, a mutual fund firm based in Boston, shared a report entitled, “Primaries, caucuses, and elections…oh my!” that looked a historical Dow Jones Industrial Average results from 1900 to 2008. The idea was to track the results of the stock market following an election result.

Did the stock market do better under Republicans? What kind of impact was there of the incumbent party losing? Who should I vote for if I want the best stock market results? (Just kidding on that last one…)

What they found was that if the incumbent party wins, no matter if they are Republican or Democrat, the Dow Jones Industrial Average performs very well to the tune of +15.1%. If the incumbent party loses, again regardless of which party it is, the stock market performed negatively (at -4.4%).

They also separated out the data to show that if Republicans win a Presidential election, the stock market gain 10.3%. This is significantly better than that of a Democrat winning and gains only being 3.9%.

Do you find the results surprising? Do you buy it?

Here’s the kicker: it doesn’t matter.

Why You Should Care Less About Presidential Elections and Their Impact on the Stock Market

There are two problems with looking back over the last 108 years worth of elections and stock market performance.

Historical Results and Future Performance

There’s a funny line on every single broker and mutual fund company’s website that reads something like this:

Claims made on historical results. Historical results do not guarantee future performance.

The idea is that hey, we’re going to tell you how awesome our mutual funds are and how well they’ve performed in the past. But, there’s no guarantee we will be able to keep performing really well in the future. (And, ahem, please don’t notice we put this at the very bottom of our website in tiny, tiny print.)

The same is true here. You’re looking at a decent amount of data, but you are only controlling for two factors: Presidential election outcome and Dow Jones Industrial Average performance. You are ignoring all of the undercurrents of the economy that surrounded that election.

Sure, the S&P 500 grew a total of 73% during Bill Clinton’s second term. Contrast that to it dropping 10.16% during George W. Bush’s first term. Based on those two results it looks like Clinton — a Democratic win — is better for the economy. It ignores some of the policies that led to the tech bubble bursting in 2000-2001 and the devastating impact of the September 11th terrorist attacks on the economy as a whole for several years.

The point is past results do not indicate future performance, and the data you are looking at is heavily impacted by other factors.

Consistent Investment Beats Timing Political and Investment Events

The second problem about worrying about the impact of a Presidential election on the stock market is you have no control over it. You have one vote. What is going to happen is going to happen. Control the things you can control and move on.

Either way — the stock market skyrocketing or plummeting — a policy of consistently investing each month will, in the long run, help you build wealth. You can’t time the market and you can’t predict election results. Trying to time the market is one of the most common flaws investors have. What ends up happening is they pull funds out right before the stock market jumps (because the market was going down, and they were nervous) and they hop right back in at the peak of the market when everything is going great (and about to crash).

Stop trying to time the market. Stop worrying about what is going to happen to your 401k balance based on an election. Worry about earning more income, spending less, and investing more in general. You will be better for it.

{ 2 comments }

Golfing Girl October 2, 2012 at 9:58 pm

Good topic. Thanks for posting this as I’ve been wondering this a lot lately.

Tony October 9, 2012 at 5:35 am

I recently did a guest post on Saving To Invest, explaining how I think the presidential election will hugely boost stocks. This election is a little different – Obama’s got QE3 to boost him up. BTW, can I do a guest post on your blog? If so, could you please contact me via email?

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