What an Election Year Means for Your Investments
Election years bring uncertainty, and this year’s presidential election is no exception. However, you might be surprised to learn that history shows they usually don’t have much impact on your portfolio. In this post, we’ll dig into the data.
What history tells us about investing during election years
To understand the impact of presidential election years on investments, we looked at US stock market data all the way back to 1927, using Kenneth French’s data library. First, we analyzed mean annual returns for the US stock market for all years 1927-2023 compared to election years during that period of time.
We found that the mean annual total return for non-election years was 12.1% and the mean annual total return for election years was 11.7%. The chart below shows these returns. However, we also performed a t-test (a way of discerning whether or not results are statistically significant) and found that the difference between election year and non-election year returns was not statistically significant. In other words, US stock market total returns are pretty much the same on average whether or not it’s an election year.
Next, we compared average annual volatility in the US stock market in all years from 1927-2023 to see if election years are meaningfully more volatile than non-election years. We found that mean volatility in non-election years was 15% over that time period, and mean volatility in election years was 15.3%. However, once again, our t-test confirmed these differences were not statistically significant, meaning the US stock market, historically, is just about as volatile on average in an election year as it is in a non-election year.
Finally, we compared the average maximum drawdown (or largest decline from a recent peak) in the US stock market in all years from 1927-2023. We found that the average maximum drawdown was slightly greater in non-election years at -16.0% than in election years at -14.6%. Again, however, these differences were not statistically significant.
It’s worth noting that our analysis picked up some small differences between election years where Republican candidates won and Democratic candidates won. The US stock market had slightly higher mean returns, lower mean volatility, and smaller maximum drawdowns during years when a Republican won the presidential election. Here again, our hypothesis testing did not find evidence that any of these differences were statistically significant. Especially given the small number of total data points, the historical differences observed are small enough to be attributed to random chance.
Even if the market does decline or become more volatile in the short term (which is always possible), it’s important to keep an eye on the long term. Risk of loss generally goes down as your investing time horizon gets longer. If you plan to be in the market for the long run, fluctuations in your account balance today could end up being blips on the radar in the future.
Should you adjust your investment strategy in an election year?
Put simply, we don’t think so. As tempting as it may be, timing the market usually doesn’t work. Any information you have that you think might impact investment performance is presumably already broadly available. This means it’s already priced in, and you’re unlikely to come out ahead.
Instead, we suggest focusing on what you can control:
- Managing your risk: Invest in a portfolio that is appropriate for your risk tolerance, and rebalance it over time to ensure you don’t drift too far from your target allocation. Wealthfront automates this process so you don’t have to think about it.
- Keeping your costs low: Choose low-cost index funds whenever possible, and invest with a service that charges a low management fee (Wealthfront’s annual fee is just 0.25%).
- Minimizing your taxes: Harvest losses and use them to help lower your tax bill. The process of tax-loss harvesting can be time consuming if done manually, but Wealthfront does this automatically and at no extra cost.
Major events like elections can rattle investors. And while it’s true that there are some small differences in the annual returns, volatility, and maximum drawdowns observed in years when the United States elected a new president, it’s worth remembering that the number of data points is very small and the differences were not statistically significant. If you look at the big picture, these small differences in performance are ultimately not worth paying much attention to.