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U.S. Presidential Elections and Financial Markets

The results of the election, which caught most pollsters and pundits by surprise, are just one more in a long series of predictive failures this year, from the doom saying in January (“Sell everything”), to the failure of a peace referendum in Colombia, to Brexit.

These failures to foresee the future are a great reminder of why we build portfolios the way we do and focus on science and academic research versus guesswork. In the short term very little is certain or predictable, but over longer periods of time, we can have greater and greater confidence in the power of markets around the world to reward patient, disciplined investors.

Since many of you may have questions about what the election results may mean for your portfolios, we have put together some data to help educate and provide perspective.

The most important thing to keep in mind is that stocks have done well during the tenure of nearly every modern president, regardless of party affiliation.

Since 1926, Republicans and Democrats have each controlled the White House roughly the same number of years — Democrats 46, Republicans 43. The U.S. stock market (measured by the S&P 500 index) averaged an annual return of 15.3% when a Democratic president was in office compared to 8.6% when a Republican president was in office.

But if you think that voting for a Democrat will automatically improve your returns, let’s take a deeper look into this data.

First, given the limited amount of data, we can’t say with any certainty that Democratic presidents deliver better U.S. stock market performance than Republican presidents.

Second, chance may also play a large part in the results. Eight of the 10 worst one-year returns occurred when a Republican president occupied the office. Is that the result of bad governance or just bad luck? If we assume it was just bad luck and remove the 10 worst returns, the average for Democratic presidents moves up to 17.0% and the average for Republican presidents leaps to 16.0%.

Third, these are simple annual returns. In reality, the election decision is known the previous November, and often there is a frontrunner much earlier, causing markets to price in expectations before the next president takes office.

But what about returns during election years? Since 1928 only four presidential election years saw negative returns. But before you attach any significance to that, realize that the average return on the S&P 500 during only the election years was slightly lower than the average return in all the years from 1928 to 2012.

The S&P data are provided by MorningstarDirect, June, 2016.

In addition, many policies take time to seep through the economy. Policy changes made today may not produce tangible results for many years. And all presidents take office under the economic conditions, good or bad, of their predecessors.

Lastly, in our tripartite system of government, with all its check and balances on power, presidents generally have a limited ability to influence markets or the economy. It is Congress that is directly responsible for budgets and spending. And Congress itself has often been divided. Since 1945, there have only been 13 years when both chambers of Congress were controlled by the same party.

When it comes to presidents, political parties and U.S. stock market returns, it’s difficult to determine any meaningful patterns. When it comes to investors, those who have fared best may have been those who stayed invested and didn’t make changes to their portfolio based on election results.