U.S. elections are pivotal events that shape the political and economic landscape of the country and is some ways the world. Despite the uncertainty that elections bring, historical data shows that markets tend to exhibit growth in the periods leading up to, and following these events, regardless of the winning party. This phenomenon underscores the resilience and adaptability of the U.S. financial markets and presents a compelling case for why now is an ideal time to invest, rather than sitting in cash. 

Historical Performance of Markets Post-Elections

Historically, U.S. stock markets have shown a pattern of growth following presidential elections. According to data compiled by S&P Global, the S&P 500 index has generated positive returns in the 12 months following 19 of the 23 elections since World War II, irrespective of whether a Democrat or Republican won the presidency. This trend suggests that markets adapt quickly to the new political environment and continue to perform. 

Key Statistics and Figures

1. Average Returns: Post-election years have typically seen an average gain of 5.7% in the S&P 500 index. This figure encompasses the performance across different administrations and varying economic conditions.
2. Partisan Impact: Analysis by Goldman Sachs indicates that the stock market tends to perform better in the first year of a new administration. Specifically, the S&P 500 has averaged a 9.3% return in the first year of Democratic presidencies and a 5.7% return during Republican presidencies.
3. Volatility Trends: The CBOE Volatility Index (VIX), often referred to as the “fear gauge” of Wall Street, typically spikes during election years due to uncertainty. However, it tends to stabilise and even decline after the election results are clear, reflecting investor confidence in the continuity and stability of market operations. 

Factors Contributing to Post-Election Market Growth

Several factors contributed to the positive market performance observed after the U.S. elections:

1. Policy Clarity: Elections remove uncertainty regarding future policies. Once the results are known, businesses and investors can make more informed decisions based on the anticipated economic and regulatory landscape.
2. Economic Stimulus: New administrations often introduce fiscal stimulus measures to kickstart economic growth, which can boost investor confidence and market performance. For instance, the significant tax cuts implemented during the Trump administration and the extensive COVID-19 relief packages under the Biden administration had substantial positive impacts on market performance.
3. Investor Sentiment: Historical data indicates that investors often adopt a “wait and see” approach leading up to elections, resulting in market volatility. Post-election, the resolution of uncertainty typically leads to renewed investor confidence and buying activity, driving market growth. 

Why Now Is an Ideal Time to Invest

Given the historical data and the factors contributing to post-election market growth, now represents an ideal time for investors to consider entering the market. Here are several reasons why waiting could mean missing out on significant opportunities:

1. Historical Precedent: As previously mentioned, markets have historically performed well following U.S. elections. This trend suggests a strong likelihood of positive returns, making it a potentially favourable time for new investments.
2. Economic Recovery: The global economy is on a recovery trajectory following the COVID-19 pandemic. Continued fiscal and monetary support, combined with pent-up consumer demand, is likely to drive economic growth, which in turn can boost market performance.
3. Valuation Opportunities: Market volatility often presents opportunities to buy quality stocks at attractive valuations. Investors who enter the market during periods of uncertainty can potentially benefit from a significant upside as the market stabilises and grows.
4. Inflation Hedging: With inflation concerns rising, investing in equities can serve as a hedge. Stocks tend to outperform other asset classes during inflationary periods, as companies can pass on higher costs to consumers, thereby protecting profit margins and shareholder value. 

Case Studies

1. 2008 Election: Following the election of President Barack Obama in November 2008, amidst the global financial crisis, the S&P 500 increased by 24% in the subsequent 12 months. This recovery was driven by significant fiscal stimulus and efforts to stabilise the financial system.
2. 2016 Election: After the election of President Donald Trump, the S&P 500 surged by 21% in the following year, spurred by the anticipation of corporate tax cuts and deregulation.
3. 2020 Election: Despite the COVID-19 pandemic, the S&P 500 rose by 16.3% in the year following President Joe Biden’s election, driven by the rollout of vaccines and substantial government spending aimed at economic recovery.

YCharts: Trump vs Biden immediate impact chart

The Cost of Waiting: A Cautionary Tale

Consider the example of an investor who decided to wait for a market dip before investing. Suppose this investor remained in cash from January 2017 to January 2020, anticipating a downturn that never materialised. During this period, the S&P 500 rose from approximately 2,275 to 3,225, an increase of about 42%. Had the investor placed £100,000 into the S&P 500 at the beginning of 2017, they would have seen their investment grow to £142,000 by January 2020. By staying in cash, the investor missed out on £42,000 in potential gains. This example highlights the opportunity cost of waiting for an ideal entry point, reinforcing the importance of staying invested in capitalising on market growth.

Long-Term Investment Strategy

Investing post-election is not just about short-term gains; it is also about positioning oneself for long-term success. The U.S. stock market has a proven track record of growth over the long term. By investing now, investors can take advantage of compounding returns, which can significantly enhance wealth over time.

Diversification: A Key to Success

While historical trends provide a positive outlook, it is essential for investors to maintain a diversified portfolio. Diversification helps mitigate risks and ensures that one’s investment strategy is resilient to market fluctuations. A well-diversified portfolio should include a mix of asset classes such as equities, bonds, and real assets.

Conclusion

The resilience of the U.S. stock markets in the face of political transitions underscores a robust economic framework that adapts to changing political climates. Historical trends reveal that markets generally perform well following elections, driven by policy clarity, economic stimulus, and improved investor sentiment. While each election cycle brings its unique challenges and uncertainties, the overarching pattern of post-election market growth remains a testament to the strength and adaptability of the U.S. financial system.

Given these insights, now represents an opportune time for investors to enter the market. By leveraging historical trends and taking advantage of current economic conditions, investors can position themselves for both short-term gains and long-term wealth accumulation.

References

1. S&P Global: Analysis of S&P 500 performance post-elections.
2. Goldman Sachs: Partisan impact on market performance.
3. CBOE: Volatility trends during election years.
4. Historical Data: Market recovery post-2008 election.
5. Election Impact: Market performance after the 2016 election.

Written by: Alex Gover – Independent Financial Adviser