Market Insights

Maintain Discipline During Election Season:
The Market’s Performance Often Defies Expectations

On November 5th, Americans will head to the polls to elect the next President of the United States. While civic participation in democracy is a hallmark of the American system since its founding, and the will of the American people to determine our next leader is consequential, history instructs investors to keep a steady hand during election season.

When we view stock market returns throughout history broken down by political leadership, it becomes apparent that regardless of the political party controlling the levers of power, either in Congress or the White House, the stock market increases in value. Market returns are far more affected by economic forces outside of the government’s reach than by overt political or fiscal policy.

The stock market has delivered positive returns under both Republican and Democratic Presidents. Investing only during the administration of a preferred party would result in far lower wealth over time.
While average returns are lower in some political scenarios, differences can often be attributed to economic recessions and bear markets outside of the government’s control. For example, under a Republican President and Democratic Congress, returns have often been strong, but were negatively affected by the Great Financial Crisis, the worst recession since the inception of the S&P 500.
Structuring investments based on campaign promises or proposed policy can often lead to lower returns. In 2016 many predicted that oil and gas and financial stocks would benefit from a Trump presidency. While those sectors performed best in the month following the election, they performed worst during Trump’s tenure, while clean energy stocks, which many expected to perform best under a Biden administration, instead performed worst.

Previously we wrote that the stock market delivered strong returns in the second half of election years, though the timing is not based on the calendar, but instead when the outcome of the election becomes clearer. This trend continued in both 2016 and 2020. Amid historically close elections the stock market rally began the week of the election and continued through the end of the year, despite concerns about a contested election in 2020.
Stocks represent a slice of ownership in a company that provides goods and services to generate wealth by harnessing the forces of the market, not the forces of the government. Investing in companies that have reasonable valuations, strong cash flows, and great management teams while avoiding aggressive changes based on the election outcome will lead to greater wealth creation over time.

Disclosure: Clean Energy Stocks performance is represented by the Invesco Wilderhill Clean Energy ETF (ticker: PBW), Oil and Gas stock performance is represented by the Energy Select Sector SPDR Fund (ticker: XLE), Technology stock performance is represented by the Technology Select Sector SPDR Fund (ticker: XLK), Consumer Discretionary stock performance is represented by the Consumer Discretionary Select Sector SPDR Fund (ticker: XLY), financial stock performance is represented by the Financial Select Sector SPDR Fund (ticker: XLF), and real estate stock performance is represented by the Real Estate Select Sector SPDR Fund (ticker: XLE).

Atlantic Edge Insights

Matthew Cochran, CFA
Robert Filosa, CFA
Ethan Caldarelli, CFA

Opinions expressed in this commentary may change as conditions warrant and are for informational purposes only. Information contained herein is not intended to be personal investment advice for any specific person for any particular purpose. We utilize information sources that we believe to be reliable but cannot guarantee the accuracy of those sources. Past performance is no guarantee of future performance; investing involves risk and may result in loss of capital. No graph, chart, formula or other device can, in and of itself, be used to determine which securities to buy or sell, or when to buy or sell such securities, or can assist persons in making those decisions. Consider seeking advice from a professional before implementing any investing strategy.