Election 2020 and the Markets – What’s to Come?

August 27, 2020

The US Presidential election is heating up. The big question on investor’s minds is, what can we expect? The markets dislike uncertainty. Add a pandemic and recession on top of it, and it brings everything to a whole new level.

What does this mean for the markets and your portfolio? Using history as a guide, here are some key takeaways.

Stocks during and after election years

The following shows the S&P 500 returns during election years and the subsequent year, going back to 1928. While there were some negative periods, most notably the Depression and 2008 Great Recession, average returns were largely positive. From 1928-2017, returns averaged 11.3% in election years, and 9.9% the year after.

Source: Dimensional Fund Advisors


Looking at previous administrations and what the returns are, it is hard to see any pattern. The President does have an impact, but there are many other factors that come into play.

Does the year within the Presidential term make a difference in performance? Not really. In fact, average returns were positive in every term year since 1926. The worst returns were in year two, although 8.6% by most accounts is not too shabby.

Source DFA Returns. S&P 500 total return from 1926-2018. Years above correspond to the year of a presidential four-year cycle. The numbers above are simple averages and not annualized.


If we look at the annualized returns over cumulative presidential terms since 1926, almost all of them are positive. The worst years again were during the Depression and Great Recession:

Source: Dimensional Fund Advisors


What about bonds?
When we look at the Bloomberg Barclays Aggregate Bond Index since 1976 (as far back as the index data goes), bonds were positive in every election year and subsequent year except for one, the infamous 2013 “Taper Tantrum” when the Fed first hinted at the possibility of raising interest rates.

Source: Dimensional Fund Advisors


What about taxes?
This is one topic on many people’s minds. Many argue that recent corporate tax cuts have largely fueled the previous market rally. What if those go away? The following chart is quite interesting. The green line represents corporate tax rates, and the blue and orange lines S&P earnings. Shaded areas are recessions. This seems to suggest that earnings are resilient and trend upward over time, regardless of corporate tax rates.

Definitions: LHS = left hand side, RHS = right hand side. Log LTM EPS: represents the last twelve-months earnings-per-share for the S&P 500 on a log scale.


What this all means
While the election creates another layer of uncertainty, this is not new. There have always been unsettling times over history in addition to elections, including wars, assassinations, runaway inflation, depressions, and now a pandemic. Yet over all these periods, investors were rewarded for the risks.

Source: Dimensional Fund Advisors


To realize the benefits, investors must accept some level of uncertainty. Markets have climbed the proverbial “wall of worry” since the beginning. Bonds have shown they can smooth out the ride, and while they can fluctuate in value, they do a great job to reduce downside volatility.

While it’s evident both parties have had significant ups and downs, investors keeping their portfolios aimed at the long-term, rather than reacting to shorter-term politics, have been handsomely rewarded over time. We do not believe this will change going forward.


Past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk.  Future performance of any investment or wealth management strategy, including those recommended by Balasa Dinverno Foltz LLC (BDF), may not be profitable, suitable for you, prove successful or equal historical indices.  Historical indices do not reflect the deduction of transaction, custodial or investment management fees, which would diminish results.  Any historical index performance figures are for comparison purposes only and client account holdings will not directly correspond to any such data.  BDF clients must, in writing, advise BDF of personal, financial or investment objective changes and any restrictions desired on BDF’s services so that BDF may re-evaluate its previous recommendations and adjust its investment advisory services.  BDF’s current written disclosure statement discussing advisory services and fees is available for review at www.BDFLLC.com or upon request.

Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this commentary serves as the receipt of, or as a substitute for, personalized investment advice from BDF.

S&P 500: The S&P 500 Index includes a representative sample of the largest 500 companies in the U.S.

Bloomberg Barclays US Bond Aggregate Index (Agg): The Bloomberg Barclays Capital U.S. Aggregate Index represents securities that are SEC-registered, taxable, and dollar denominated. The index covers the U.S. investment grade fixed rate bond market, with index components for government and corporate securities, mortgage pass-through securities, and asset-backed securities.