A Closer Look at Election Years
2020 is off to a roaring start, picking up right where 2019 left off. Many investors are eyeing the upcoming presidential election as an impending storm for the stock market. In the four-year presidential cycle, pre-election years have tended to be the strongest for stocks, as sitting presidents have taken measures to boost the economy and stock market higher to garner votes. It sure worked out well last year, with the S&P 500 Index’s 31% total return.
Returns in election years, however, have been quite bifurcated.
“If an incumbent president was up for reelection, stocks tended to do extremely well,” explained LPL Financial Senior Market Strategist Ryan Detrick. “On the other hand, if there was a lame duck president in office, returns were quite muted.”
Note that a “lame duck president” means the sitting president either isn’t running for reelection or has already fulfilled the maximum two terms. It makes sense, as the president could be less motivated to do things to heat up the economy if they know they are leaving office. Possibly, investors may also get cold feet knowing a change is coming. The S&P 500 was down in 2000 and 2008, and the sitting president was a “lame duck president” both years.
In the LPL Chart of the Day, we break down election years by whether the president was running for reelection or a lame duck. The chart shows the S&P 500 up an impressive 11.7% on average if the President was running for reelection, compared to up an average of 2.4% if president was a “lame duck president”.
Given most presidents who have run a second time have tended to win, this could be the market’s way of saying it is comfortable with the status quo over change.
Another encouraging historical trend is that the S&P 500 hasn’t been lower during an election year with an incumbent president up for reelection since 1940. To be clear, stocks have been up during election years when the incumbent president actually lost. In 1980, the S&P 500 gained nearly 26%, but Jimmy Carter still lost to Ronald Reagan. In other words, this does support the notion of higher stocks in 2020, but higher stocks can’t always tell you who will win in November.
For more of our investment insights, check out our Outlook 2020: Bringing Markets Into Focus.
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