“Increased Volatility” or “Increased Volatility?”

There is little doubt that during an election year that there is a perception of increased volatility. This is to be expected as investors likely react to the uncertainty surrounding policy changes. However, given that presidential elections are in four-year increments, the data associated with the stock market is limited. But with the information that is available, we witness an unexpected result. As illustrated in the graph below, while the perception is that markets can be jittery in an election year, we see that it may not actually be the case. In seven scenarios out of the nine, T.Rowe. Price finds that the volatility is lower in presidential election years when compared to other years.

source: https://www.troweprice.com/content/dam/trp-ecl/global/en/ipc/assets/us-retail-intermediary/2024/april/how-do-us-elections-affect-stock-market-performance/how-do-us-elections-affect-stock-market-performance.pdf

Stock Market Gains or Losses

Policy decisions by the party in power are expected to shape the market, therefore the markets will go up or down based on those policies, right? Over the short-term this may be due to the market adjusting to new policies and the uncertainty surrounding the party’s ability to implement them. Interestingly, a study done by US Bank shows that the markets do move slightly leading up to and shortly after the election. These gains look to be temporary, and market conditions usually normalize once the new policies are defined.

source: https://www.usbank.com/investing/financial-perspectives/market-news/how-presidential-elections-affect-the-stock-market.html

In the long run, elections have little bearing on market performance. Instead, economic and inflationary factors are the primary drivers of returns. Looking at data compiled by TIAA, we see that the average annual return during the election years was 10.2%, while over the same period the S&P 500 produced an average annual return of 10.1%.

source: https://www.tiaa.org/public/pdf/t/tiaa-cio-perspectives-2024outlook.pdf

What Should You Do?

Data shows that perception that presidential elections significantly impact the market are just that, perceptions. Historical data demonstrates that their long-term impact is minimal. The broader strength of the economy and inflationary trends act as a greater influence on market performance. During election years, trying to guess what the market will do is not reliable. Instead, focusing on your long-term plan and resist the urge to trade based on the election. A well-balanced investment approach over the long term is ideal for market volatility to meet your long-term financial goals.