Do Stocks Predict The Election Outcome?

2020 has been a year for the ages, but the craziness may not be through with us yet. There is a presidential election coming up in November that may be different than ever before.

The two political parties have never been so far apart and the vitriol has never been greater, at least in recent history. And the race could be close. At the same time, the integrity of the election and results could be thrown into question by largely untested mail-in voting. If there is any question regarding who won, the parties are unlikely to handle it well. A contested election could get rather ugly.

The market could get roiled for weeks or even months after Election Day while things get “sorted out.” And Wall Street may already be anticipating this risk.

Presidental Election Year Good for Stocks

But predicting the future is a dicey business. You never know, after all. This year is a testament to that fact. It’s also true that the market has a long history with presidential elections. After all, they happen every four years, and that history is remarkably positive.

In fact, the stock market has fared very well in presidential election years. According to a 2019 study by Dimensional Funds, in the 23 elections since 1928, the market was positive in 19 of those years and only recorded a decline four times (1932, 1940, 2000, and 2008).

But there were very powerful reasons besides the election that caused the market to fall in those years. In 2000, there was the bursting of the tech bubble. The financial crisis began right before the 2008 election. And the first two had to do with the Great Depression and World War II.

presidential

Presidential election years are almost always good for stocks. Taking a look at the above chart (courtesy of Morningstar), you can see that election years have been quite positive for stocks. Since 1928, the average return in presidential election years is 11.3% better than the S&P 500 average annual return over the same period. But there are some things worth noting.

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