Think Big Picture When It Comes to Elections

Key Takeaways

• With election uncertainty often comes increased market volatility, but this typically subsides after the election. 
• Historical market performance has varied widely around elections but has on average been positive regardless of which political party has been victorious.
• Market timing based on elections is risky and unlikely to outperform a consistent investment strategy.
• Despite the potential impact of political events, long-term investing often leads to positive returns. A well-crafted financial plan, guided by a professional advisor, can help you navigate market volatility and achieve your financial goals.

While much of the circumstances surrounding presidential elections change from election to election (and indeed, the 2024 cycle has been exceptional in many ways), some things never change. With increasing certainty about the major party candidates, the quadrennial debates have begun on who will take the White House and what a victory for either party could mean for the stock market.

Less than 100 days until the election in November, we’ve seen a significant sell-off and heightened volatility so far in August. In the coming weeks and months, election-related headlines will likely offer investors plenty more potential questions about their portfolios. However, the reality is that much more impacts market returns over time than which political party controls the Oval Office. 

Allowing election-driven anxiety to lead you astray from your long-term financial plan may result in more harm than good. To demonstrate, we offer context on how markets have behaved historically around elections and, just as importantly, highlight why investors should be careful about inferring too much from past results (or other theories they hear in the news) as they form their expectations for the future.

How Does Uncertainty Around Elections Affect Market Volatility?

Let’s start with a fundamental question: What is it about election cycles that stokes investors’ fears? Heightened uncertainty likely plays a role. When uncertainty rises in the market, it can lead to higher volatility. So, while investors may care if markets have tended to go up or down before and after elections and what might drive these outcomes, we also wanted to understand if historical volatility near elections offers any useful insights.

We computed average levels of the VIX Index, a well-known measure of implied market volatility taken from S&P 500^® Index option prices, for each of the three months preceding a general election month (August through October), during each election month (November) and each of the three months after the election month (December through February).

Data for the VIX begins in 1990, providing a small sample size (eight elections) but enough data to determine whether markets have tended to behave in line with our intuition over recent periods.

In Figure 1, we present the summary results. What we find across these elections, beginning with George H. W. Bush’s 1992 victory and ending with Joe Biden’s latest triumph in 2020, is that, on average, volatility has risen leading up to the election month (when uncertainty around the election outcome may still exist) and eased moderately in the months after (when the market knows the election results).

Of course, the averages don’t tell us everything. Baseline volatility levels can vary quite substantially from election period to election period. For example, consider the sample group for the election month only.

The highest election-month VIX average was 62.8 in 2008, followed by 26.4 in 2000. The lowest was 13.6 in 2004. VIX levels also increased significantly in the months leading up to the 2008 election, which occurred right in the heart of the Great Financial Crisis (GFC) period — a prime example of how investors consider many other issues beyond elections in setting market prices.

However, the pattern of volatility change around elections is similar across the sample (i.e., average VIX level declines in the three months after election month for all but one of the eight elections) and removing 2008 as an outlier doesn’t change the takeaway. The useful point is understanding that election uncertainty may contribute to higher volatility, but knowing that, at least recently, it has tended to temper after the election outcome is known may be good for investors to keep in mind.

Figure 1 | Average VIX Index Levels Before, During and After U.S. Elections From 1992 to 2020

How Have Markets Performed Around Past Elections?

To examine stock market performance around elections, we have data for the U.S. stock market going back to the 1928 election won by Republican Herbert Hoover through the 2020 election (24 total elections). Again, this isn’t a very large sample size. So, while we can observe market performance around these elections, it’s also important to bear in mind the limitations of the data before concluding that historical patterns are likely to play out in the same way for future elections.

Figure 2 helps illustrate this point. These charts show market performance in election years (January through December) when a Republican versus a Democrat was elected president, as well as performance during each full four-year term starting from the month candidates were sworn in after each election (January). 

In the first panel, we show the full sample starting in 1928 and find that, on average, the market has performed meaningfully better in years a Republican candidate was elected versus a Democrat. On the other hand, returns during Democratic terms have been much higher than those with Republicans in office.

If we remove only the first two elections (a period that included the 1929 stock market crash and the Great Depression) and focus on the remaining 22 elections, we see the differences narrow considerably. This example shines another light on the reality that when we look at a set of data through a specific lens, significant events (or externalities) may affect market returns over time and significantly impact the results.

Figure 2 | Average U.S. Stock Market Returns by Winning Party in Election Years and Four-Year Terms

In fact, many notable events throughout history have weighed on markets and shouldn’t be ignored when assessing historical returns around elections. The table in Figure 3 shows the same data summarized in Figure 2, with the winner of each election and their party, along with examples of other significant events impacting markets during each period. 

Notably, despite the tough times that inevitably occur at different points through time, the market delivered positive returns over all presidential terms but three (after the 1928, 1936, and 2004 elections, which all coincided with major economic or geopolitical events). Only four of the 24 election years in the sample saw a market decline. Considering the many other factors facing investors in these times, it’s difficult to assign causality for how the market performed solely to the commander in chief or their party affiliation.

Figure 3 | Events Impacting Markets Around U.S. Presidential Elections