How Will the 2020 Presidential Election Affect the Stock Market?
How will the 2020 presidential election affect the stock market? That’s a big question on the minds of many. Today, we’ll dig into some numbers. We’ll show you what happened to the stock market in the three months before and after previous presidential elections.
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This year is off to a crazy start. It started with the Coronavirus. That caused the stock market to drop by about 34%. From the bottom of the bear market to today, we’re now close to all-time highs. The stock market has increased by almost 50%.
The virus is still a factor in our lives. Now we get to add a presidential election to the mix. How will the campaign season influence the market?
Elections and the Stock Market: Historical Data
We are focusing on the three months before a presidential election. This means August, September and October. And we are looking at the three months after. This includes November, December, and January. We have nine election years going back to 1980.
The 3 Months Before
The average gain of the stock market for the three months before an election was about 0.75%. Stocks improved six out of the nine years.
The 3 Months After
For the three months after an election, the stocks gained 2.36%, on average. It was positive in seven of the nine years.
The Outlier: 2008
There was an outlier. 2008 was a really bad year. From August to October 2008, the stock market dropped by about 23%. Following the election, the stock market continued to decline. It fell another 22.5%.
If you remove this outlier from the data set, the results look much different.
Leading up to the election, the gain improves to about 3.5%. After the election, if you take out this outlier, the stock market improved 5%.
Will this year be more like 2008?
The election didn’t have the type of impact on the stock market that one might think. But you might be wondering right now, “Will this year be more like 2008?”
- The stock market is really close to all time highs. There are lots of experts concerned about a bubble building up with valuations.
- The virus is still a major factor.
- States are still being somewhat restrictive in what they allow people to do. And that has an impact on businesses.
- The market is also anticipating another stimulus package. Right now, the republicans and democrats can’t seem to reach an agreement. The longer that goes, the more volatility will see.
But there are also reasons to expect this rally to continue. Some data points to better things ahead.
Trend vs. level: so far in Q2 earnings season, there’s been a record beat rate for EPS (despite actual growth being quite dismal) @SoberLook @scotiabank @Bloomberg pic.twitter.com/0K0hLQu3sH
— Liz Ann Sonders (@LizAnnSonders) August 3, 2020
July @ISM Manufacturing much stronger at 54.2 vs. 53.5 est. & 52.6 in prior month … index at highest since March 2019, boosted by new orders (highest since Sept. 2018), production & new export orders; unfortunately, employment still contracting pic.twitter.com/4ea5umq0Rg
— Liz Ann Sonders (@LizAnnSonders) August 3, 2020
US daily tracking for the past six weeks via @fundstrat #Covid19 pic.twitter.com/gRkjYrB6nE
— Jon Najarian (@jonnajarian) August 5, 2020
Vaccine Progress
Companies are making progress on a vaccine. A lot of the optimism in the stock market relates to the optimism of a vaccine coming to market sometime next year. There are a number of companies now entering second and third stage trials.
The Big Question: Do Your Long Term Plans Depend on the 2020 Election?
It is hard to make big allocation decisions based on short term events. Most of the historical data points to the election not being a significant factor to stock market performance.
Your long term plans aren’t likely to change based on the outcome of this election. This makes it very difficult to make a decision based on that outcome. .
The election concerns many people. There’s a very big divide between the two sides. It’s very contentious and very emotional. This creates a desire do something. Some think if “Candidate A” wins, things are going to go downhill. And if “Candidate B” wins, things are going to be great. But we don’t know what that outcome will be.
Making big decisions based on short-term events, creates more chances to make mistakes. That’s not a real good way to do things.
You need to base your asset allocation decisions on your long term plans. You shouldn’t base them on what happens in a presidential election.
Have Questions?
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About the Author
Neal Watson is a Certified Financial Planner™ Professional and a Financial Advisor with Fleming Watson Financial Advisors. He specializes in helping hard working, middle class families plan for retirement.