How do Congressional elections affect stocks?
Every two years, we elect the U.S. House of Representatives, a third of the U.S. Senate, state governors, a slew of state and local officials, and vote on ballot initiatives such as amendments to state constitutions. All of these choices are important. We encourage each of our clients to dig into the candidates and the issues as deeply as they wish.
However, every election year we also find ourselves compelled to urge clients not to make portfolio decisions based on their views of election outcomes. Our mission is to be “A Sanctuary From The Noise®” and elections create a lot of noise.
Our mission is to be “A Sanctuary From The Noise®” and elections create a lot of noise.
For true investors deciding how much exposure they should have to the stock market, the track record of completely ignoring both election forecasts and outcomes is very strong. We’ve shared some examples over the years.
Will the election cause a market crash (2019) Seeing that emotions would be especially high in 2020, this was our attempt to nip election angst in the bud. It includes a brief history of negative campaigning and market behavior around elections.
Assessing the “Trump Bump” – What to Do Now (2017) Describes the futility of market timing and describes differences between how investors and speculators answer fundamental questions about market behavior.
Which presidential candidates will be good, or bad, for the markets? (2016) Explains how almost every president in modern times saw tough times in the market and the economy, suffering both bear markets and recessions.
Should I prepare my portfolio for a post-election drop? (2012) Describes how betting on “patterns” about which parties hold the presidency or the houses of Congress has been costly in the past.
Here is a newer example that shows the wisdom of ignoring election forecasts, the news, market volatility, and what can happen when we let the power of compounding over a lifetime do its thing. Starting with the first presidency after World War II, and using the S&P 500 Index as a proxy for the market, if you only invested when a Republican was president and went to cash when a Democrat was in office, $10,000 invested in the first quarter of 1949 would have grown to $83,360.22 by the end of Q1 2024. Flip the choice of political party and only invest during Democratic presidencies, and your $10,000 would have grown to $414,703.12. That’s a notable difference, but the sample size is much too small to conclude that one party is destined to be better for markets than the other.
The difference is also nothing compared with what you could have done had you ignored which party was in the White House. Simply staying invested could have turned your $10,000 into a whopping $3.46 million! That 75-year period was full of terrifying news and bad markets. Investors who were resilient enough to go along for the ride were handsomely rewarded for using a long-term, non-partisan investment strategy.
Seventy-five years is longer than most people’s investment time horizon, but the concept holds over shorter periods, as we showed in Why true investors don’t worry about their portfolios on Election Day (2023). In that post, we looked at every election since 1928 and simulated getting in when our party wins and out of the market when our party loses the presidency. We then compared the results over the following 28 years—an even seven terms and a fair time frame for either accumulating money for retirement or funding a nice retirement starting at a typical retirement age.
Mid-term election years like 2026 do not get as much attention as years in which we select a president, but they often present a different question: Which combination of party in the White House and houses of Congress is best for the markets?
Which combination of party in the White House and houses of Congress is best for the markets?
There are six primary possibilities: a Democratic president with a Democratic Congress, a Democratic president with a Republican Congress, a Democratic president with a split Congress, a Republican president with a Democratic Congress, a Republican president with a Republican Congress, and a Republican president with a split Congress. Using the same time frame after World War II, five of the six combinations averaged more than 10% annually for the S&P 500 Index. The worst performing combination still averaged 7.5%. Again, the sample size is too small to conclude any particular combination is best for the markets, but it is fair to conclude that a long-term, non-partisan investment strategy is likely a good way to go.
The reality is that the market—the aggregate value of businesses—grows over time not because of politicians, but because companies consistently innovate, create, adjust, and drive increasing profits. It’s easy to let politics cloud our judgment, but history has shown that regardless of who is President, which party controls the houses of Congress, or what policies are enacted, entrepreneurs and companies find ways to adapt and thrive after changes to rules, the tax code, or the economic environment. Innovation and creativity are the true engines of market growth over time.
It is important who gets elected and what they do. Please vote for the candidates and initiatives you think best. But also, please try not to get caught up in the rhetoric or let your desire for a specific outcome distract you from the fact that a long-term, non-partisan approach to the stock market has been effective. Vote with our ballots, not your life savings.
Prior posts that may help maintain some perspective
How to be a more resilient investor
What to expect from financial markets
For successful investing, control your intake of news