Ahead of each presidential election, uncertainty leads many to worry about the stock market and the possible effects on their own earnings. But in spite of this cyclical anxiety, you may be surprised to learn that, historically, elections have little effect on the market.
Since 1833, according to The Stock Trader’s Almanac, the Dow Jones Industrial Average has gained an average of 10.4% in the year before a presidential election and gained an average of nearly 6% during an election year. The first and second years of a presidential term, however, see average gains of 2.5% and 4.2%, respectively. These are modest but positive results.
That’s not the only surprising thing about the market during an election season:
- The winning party may not matter. Regardless of politics, the market tends to experience greater returns due to normal variations rather than which party wins the White House.
- Government gridlock may not lead to market growth. InvesTech research has shown the S&P 500 stock index gains an average of 16.9% when one party controls the White House and both houses of Congress. By contrast, the stock index historically only gains an average of 5.5% when the houses of Congress are divided.
- The market may predict election results. As evidenced by election trends since 1928, if the stock market is up during the three months before an election, the incumbent party will typically remain in power. But if the market is down during that time period, the other party will typically take control.
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