Few events can be as uncertain and last as long as the run-up to a U.S. presidential election. For a year or more, the election is constantly in the news, frequently in the context of how it may affect investment portfolios. Many observers, including some in the investment management business, offer market predictions based on which candidate or party may be victorious.

Vanguard believes that, as with most-short term predictions, such forecasts are dubious, and that investors should let long-term historical context guide them.

Adam Schickling, an economist in Vanguard Investment Strategy Group, analyzed more than 150 years of asset returns to see whether a relationship with electoral events existed. He examined not only returns under Republican and Democratic presidents but also whether election year uncertainty exposed markets to lower returns and/or higher volatility.

Elections, returns, and volatility

“While historical performance is not a guarantee of future results,” Mr. Schickling said, “150 years is a large enough data set to form reasonable future expectations. Discounting historical results under the guise of ‘this time is different’ is falling prey to a classic investing fallacy.”

Using an allocation of 60% equities and 40% fixed income, Mr. Schickling found a modest return differential under administrations of different parties. “However, this difference is statistically insignificant and time-period-dependent,” Mr. Schickling said. “It offers little to no value in the context of an investment strategy.” He also found that a modest return differential exists between presidential election years and non-election years. “Again,” he said, “this result is statistically insignificant and likely attributable to randomness, or noise.”

Different ruling parties, similar returns

Since 1860, the annualized return for a 60% equity, 40% fixed income portfolio has been 8.4% in years with Democratic U.S. presidents and 8.2% in years with Republican U.S. presidents. The annualized return during election years has been 8.9% and in non-election years 8.0%.Source: Vanguard calculations of a 60% equity, 40% fixed income portfolio are based on data from Global Financial Data. Years are categorized based on which political party occupied the White House for the majority of the year.

History suggests that investors shouldn’t be concerned about material differences in returns under different political administrations. But how does the market respond during an election year?

Our analysis of monthly returns failed to detect any performance pattern. Several different months were as likely to be ranked first as second, or fifth, or 12th. The number of unique months in any performance rank over the last dozen presidential election years averaged 7.2. For comparison, a completely random data set would average 7.8 unique months in each performance rank, Mr. Schickling said. In short, monthly returns during election years are very close to random.

“Most tactical election-year investment strategies have suffered from look-ahead bias, generating hypothetical outperformance using information that wasn’t available at the time,” Mr. Schickling said. “A ‘buy November’ strategy may have been promoted heading into 1984, based on its performance in 1972 and 1980, but then it underperformed in 1984 and 1988.”

A near-random monthly performance distribution
In U.S. presidential election years since 1972, seven different months have been the top performance months of that year for the Standard & Poor’s 500 Index. Months that have been top performers in some elections have been bottom performers in others. Source: Vanguard calculations of Standard & Poor’s 500 Index returns in election years, based on data from Thomson Reuters.

Investors similarly shouldn’t expect equity market volatility to be higher in the run-up to an election. Mr. Schickling found that equity volatility has been modestly lower in the weeks leading up to and following a presidential election than over a full market period. The result is not statistically significant.

Equity volatility is lower in the weeks before and after an election


Annualized S&P 500 Index volatility has been 13.8% in the 100 days both before and after a presidential election since 1964, lower than annualized volatility for the full period from January 1, 1964, through December 31, 2019. Source: Vanguard calculations of S&P 500 Index daily return volatility from January 1, 1964, through December 31, 2019, based on data from Thomson Reuters.

A multiple-issue issue

So what might be different about a U.S. presidential election—or any election—in an investor’s psyche? Most events that might lead an investor to think about straying from a well-considered long-term strategy are single-issue events, said Jonathan Lemco, Ph.D., a senior investment strategist in Vanguard Investment Strategy Group. “U.S. presidential election-year politics touch upon multiple issues to inform four years of policy-making,” he noted.

“It’s important that investors not lose sight of their own goals and their own long-term strategies,” Mr. Lemco said. “Financial markets are incredibly complex systems affected by 101 different external variables whose levels of importance depend on valuations, business cycles, and investor sentiment, just to name a few. Politics is just one of these many variables, offering little to no insight in isolation.”









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