Election Day is less than a month away, and for some of us, that day can't come soon enough. The campaign has hit a fever pitch with ads flooding the airwaves and candidates being criticized and reported on non-stop.
With the 2024 presidential election fast approaching, it's time to take a look at the impact past campaigns have had on financial markets and if there are any trends that could help us make more informed investment decisions over the next four years. future. (For the complete 2024 election book click here….)
Many are considering which candidate will have the biggest impact on the economy and capital markets. A popular belief is that Republican presidents are better for financial markets. While this belief leads to the nomination of a Republican to office, it does not hold true during the Republican term as the markets, especially stocks, tend to perform well regardless of which party is in the Oval Office.
In fact, there have only been two presidential regimes, both Republicans, when stocks have produced negative returns throughout the term – President Richard Nixon (January 1969 – August 1974) and President George W. Bush, (January 2001 – December 2008) since the year of the Great Depression. Conversely, there have only been two presidential regimes, both Democratic, whose 10-year total Treasury returns were negative throughout the term – President Jimmy Carter (January 1977 – December 1980) and President Joe Biden (January 2021 – present).
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Additionally, stocks experienced their best performance under the watch of Democratic presidents as the S&P 500 index posted a +15.2% return during President Bill Clinton's two terms and a solid +13.8% during President Barack Obama's two terms. Conversely, Republican President Donald Trump oversaw the best performance for the red party with a return of +13.7%.
There have been 15 presidents since the Great Depression, and of those 15, the S&P 500 index posted double-digit returns during eight of the terms. (Figure 2)
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Meanwhile, bonds typically perform better under a Republican regime. As you can see in Figure 3, the four major periods of total return performance for 10-year government bonds occurred under Republicans. Additionally, all major fixed income sectors outperformed on a total return basis under Trump vs. Biden (Source: Zephyr).
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When we focus on the near term, inauguration years tend to be good for stocks, regardless of political party. In fact, the S&P 500 index posted returns of over 20% over the past four years of inauguration (2021, 2017, 2013 and 2009) (Figure 4). Additionally, there have been 12 inaugurations since 1977, in which four of those inaugural years resulted in over 30% returns for the S&P 500 index (2013, 1997, 1989, 1985).
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Trying to make a case that one presidential party is better for markets than another is even more difficult when looking at equity sectors. The S&P 500's best-performing sectors during Trump's tenure were information technology (+31.54%) and consumer discretionary (+20.59%). In what may come as a surprise to some, the worst performing sector between January 2017 and December 2020 was the energy sector (-11.94). The story turns to the best performing sectors during Biden's term (through September 2024) as the energy (+30.84%) and information technology (+20.09%) sectors outperformed. However, the consumer discretionary sector was the worst performing sector between January 2021 and September 2024 (+6.60%) (Source: Zephyr).
While equity performance has typically been strong during the first year of a presidential term and generally positive throughout their time in office, equity (VIX) and bond (MOVE) volatility typically spikes immediately after Election Day, regardless of party is a winner. However, stocks and bonds tend to experience more volatility after a Republican victory (Figure 5).
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While popular belief is that Republican presidents are better for financial markets, that's not necessarily the case, especially for stocks. While the presidential party in office may have an impact on which equity sectors perform better than others, the broader equity market tends to perform well regardless of which presidential party is in office. However, history also shows that bond performance tends to be better under Republican regimes.
There will continue to be debates about which presidential party is better for the financial markets for the rest of time, but history shows that these debates are irrelevant. The performance of financial markets, especially stocks, does not depend on who is in the Oval Office, but rather on the health of the economy and corporate earnings. Instead of focusing on who will be president for the next four years, focus on the long term when building your investment portfolio.
Ryan Nauman is Market Strategist at Zephyr